How to Secure Loan for 5-Plex

Question

Based on my research, and what I've heard from numerous lenders, a 5 unit home is classified as a commercial property, and can only qualify for commercial loans. Is this understanding correct?

So far, the only bank/lender we have found that offers loans for this type of property has unfavorable terms. They do not offer long term fixed rates on commercial property.

Do you have any advice on who does offer more favorable terms for 5 unit residential (i.e., commercial)? I am looking for a 30 year fixed rate loan with a reasonable APR. Ideally a 20-25% down payment.

Michael Albaum · Answer

Hey April, you nailed it; 5+ units = commercial property and thus commercial lending. Every single lender I've worked with for commercial lending, they only offer fixed terms for 5 or 10 years with 20 or 25 year amortization periods. Making the leap into the commercial lending space is often a rude awakening from the residential space since there is seldom long term fixed financing available. Obviously, if you come across a commercial lender that will give you the same type of mortgage product as a residential lender, then let me know who it is as I'd love to use them as well!

In the commercial world, lenders know that it's purely business in that the units will be rented out and usually on 1 year leases. As such, they assume there is more volatility and your cash flow will not be as stable as compared to an owner occupant living in a SFR. Best of luck!

Account Closed · Answer

@Joshua Myers yes. They do 1-4 unit all of my business' clients. They will go as low as 50k purchase price for my clients now if need be. They're extremely flexible with me on deals with complex conditions. Algorithm based valuations that only require drive-by's.

Because I'm not just an investor, but I own a rental property sales business, all of the little benefits that have come from a relationship with them accumulate to become extremely valuable over the course of about 100 transactions annually.

Stephanie P. · Answer

@April Eilers and @Michael Albaum

The best financing for commercial is through local banks.  They usually have a commercial unit that can accommodate investors.  They will require full tax returns etc...

There are other ways to finance that allow for 30 year fixed loans, but they are a bit more expensive; portfolio lenders.  They don't require income verification and sometimes only require source for cash to close (and no reserve requirement).

Stephanie

Tom Dieringer · Answer

With a commercial loan, as it approaches the end of it's term and assuming you have been managing the property well and profitably, is it both reasonable and common to be able to refinance the remainder with another commercial loan?

Account Closed · Answer

@April Eilers I say rip the band-aid off with commercial financing sooner rather than later. Financing with a portfolio lender is going to become necessary if you really want to build a substantial portfolio at some point, and their willingness to work with you is going to be highly predicated on their relationship with you and track record when working together.

The balloon scares some people at first, but there is a flip side to it. Qualification is easier once you demonstrate experience, underwriting is less rigid, and acquisition rate can be ramped up quickly once a portfolio lender trusts you.

Big banks that offer commercial products can be really inexpensive as well. I get commercial financing with 20% down rather than 25%, no points or fees other than the appraisal, and the same rates conventional loans offer.

Joshua Myers · Answer

Account Closed did you transition to a portfolio lender before exhausting your other options?

Nicole H. · Answer

@April Eilers do the numbers work such that you could sell it for an acceptable return before the balloon?  Shifting your strategy a titch might still net you a positive result. Hope that helps!

Ryan O'Mara · Answer

@April Eilers - most loans for pure commercial properties like 5+ units will come with fixed terms of 3, 5, 7, or 10 years. There are a few that would offer a full 30 year fixed. But it's not the norm. And the rates tend to be higher.

April Eilers · Answer

Thanks for the info!

April Eilers · Answer

Thank you so much, that makes perfect sense!! Would be a shame for the interest rate to balloon in the future. I'm thinking it might be best to stick to 4 units or less. Maybe if I found a deal on a property with more units, but 5 units doesn't seem to be worth it IMO.