5 or more units and commercial lending

[Lester Appel]

I am in Tucson Az looking for buy and hold, I have found some that calc out buy require commercial lending. This I have no experience at and I am looking for help

[Jon Holdman]

What is it you're asking?  "Conventional loans", that is, loans that conform to Fannie Mae and Freddie Mac's rules, are limited to four units or less.  Anything larger will require a "commercial" loan.  Some banks do these, as do other entities such as insurance companies.

[Lester Appel]

I am looking for a lender for 5 unit property 

[Lester Appel]

and information about these loans 

[Ashley Pimsner]

@Lester Appel

Commercial loans are great and require an LLC and a DCR (debt coverage ratio ) of 1.25 or greater... ex if debt service i.e mortgage minus taxes and insurance payment =$1000 then rents need to be $1250.

Search local portfolio lenders aka small banks in the area of subject property and ask to speak with  VP in commercial department and inquire about loans for "investment properties" and ask about requirements.

[Nick L.]

@Lester Appel

Commercial loans are different from 1-4s in the following ways:

- Shorter terms (typically 3, 5 or 7 years) and shorter amortizations (typically 20-25 years)

- Usually have a minimum debt service ratio like @Ashley Pimsnersaid

- Higher interest rates

- Some are more focused on investor strength; others are more focused on property strength. It depends on the lender.

- More flexible and more negotiable. For example you can roll in rehab costs, construction costs or other factors that a conventional loan won't consider.

[Josh Nicolson]

If it's just five units. You can buy it with cash, put in a door between the units and make it a fourplex. Then after your delayed financing you can "change your mind" and turn it back to a fourplex. 

For Tucson, Wells Fargo has pretty decent terms for commercial loans. 

[Kevin Wong]

To figure out the loan size you will qualify for, you will need to know what the cash flow on the property is to get the DSCR as well as the NOI to figure out the property value. Generally apartment loans have a limit of 1.25 DSCR and 75% LTV, whichever is lower. There are 5yr, 7yr, 10yr+ fixed interest loans that are amortized 30yr with 10-30yr term. Banks will consider the size of the loan, the location, property condition, cash flow, borrower financial strength, experience, leverage and various other factors as part of their consideration.

[Lester Appel]

Thanks you all I am trying to digest all this and will approach lenders soon. I have a business banking relationship as well as personal with Wells so perhaps I will start there.

I guess this is typical, but the seller requires a contract before allowing viewing of the property, of course this would be contingent upon loan, inspection, etc. but I have yet to view property number 2. as far as property number 1 I have seen the units and their may be issues with gas wall heaters, but they are neat and clean with a long history of rental

[Jeff B.]

Originally posted by @Ashley Pimsner:

@Lester Appel

Commercial loans are great and require an LLC and a DCR (debt coverage ratio ) of 1.25 or greater... ex if debt service i.e mortgage minus taxes and insurance payment =$1000 then rents need to be $1250.

Search local portfolio lenders aka small banks in the area of subject property and ask to speak with  VP in commercial department and inquire about loans for "investment properties" and ask about requirements.

Sorry Ashley, A commercial loan DOES NOT REQUIRE an LLC or any other entity structure. All MFU 5+ properties DO REQUIRE a commercial loan. I stumbled into this 'other world' when purchasing my 6-unit apts.

[Jeff B.]

Originally posted by @Josh Nicolson:

If it's just five units. You can buy it with cash, put in a door between the units and make it a fourplex. Then after your delayed financing you can "change your mind" and turn it back to a fourplex. 

For Tucson, Wells Fargo has pretty decent terms for commercial loans. 

 OUCH;  IMO, You're publicly using your name to promote F R A U D.

Frankly, I found commercial loans easier in the respect that my personal credit, DTI was not part of the qualification process - - to each his own!

[Ashley Pimsner]

@J Beard 

My local banks and portfolio lenders did require a biz entity/ LLC so that personal credit, DTI was not part of the qualification process, but glad you found a lender who didn't require costly LLC set up...maybe it was because I was getting loans for properties less than 5 units.

Agreed MFU 5+ require a commercial loan without LLC but you can also get a portfolio loan from a small bank which in most respects is similar to a commercial loan (No dti, personal credit) for 1-4 multi and SFR "investment properties" as long DCR etc work AND in a biz entity like LLC.

Sorry for confusion about need for LLC for 5+ and agree that scenario described by @Josh Nicolson could be considered mortgage fraud.