Fourplex Zoned as Commercial; is a Conventional Loan an Option?

Question

Hi BiggerPockets Community,

I am looking to purchase a 4-unit property in Indianapolis, however, looking at the property parcel card, the property has been zoned as a commercial property.

Would I be able to get a conventional loan for this property, or would I be required to go down the commercial financing route?

The cash-flow for this property looks great using a conventional loan, however, I understand commercial financing is more expensive and will make the property less attractive if I have to go down this road.

Thanks in advance for any advice you can provide!

Dean West · Answer

Thank you everyone again for your input.  As I hate not finding the ultimate answers when I look at other people's postings, here is how this situation was resolved:

This property was labeled as a commercial property for TAX CLASSIFICATION purposes (any property in Marion County, Indiana that has between 4 - 19 units is taxed commercially).  However, this property is ZONED as D-8 (residential zoning) which allows one to get a conventional loan.

I hope this helps any other investors out there that have encountered similar situations!  Thanks again BP community for your quick and thoughtful responses.

Matthew Schroeder · Answer

@Dean West  You've already gotten some good recommendations, but if I were you, I might also ask the question, "why is it zoned commercial?".  Are the properties on either/both sides also zoned commercial (or are they zoned residential?), and what are the uses of the neighboring properties (are they also residential)?  Sometimes (not always), there is hidden value in zoning (zoning arbitrage).

Greg Dickerson · Answer

4 units and under is residential as defined by HUD guidelines which is what the lenders use so you should be all good. Of you do need to go for a commercial loan there are some good rates right now just shorter term amortization so cashflow will be lower but the property will be paid off sooner if your holding long term. If your after shorter term cashflow you can get interest only for 3/5/7/10 year terms at very low rates right now.

William Hochstedler · Answer

You will be able to finance it with a residential loan for 1-4 units.  The only thing to be aware of is the appraisal will have to state that the residential use is legal.  Depending on the city, this may be a non-issue or you may have to get a certificate of legal non-conforming use from the municipality.

Cory Carlson · Answer

I would call your local lenders and ask them. From my understanding of commercial mortgage (My principle is both commercial mortgage broker and RE Brokers), despite the zoning being commercial, the underwriters would NOT originate a loan on the existing building being a 4-plex. Perhaps you got more creative with intentions of a buildout to add units where commercial financing would be an option. We have originated a commercial loan on for example, 3 duplex's all next door to each other that are NOT part of a larger group of duplexes. I believe the zoning has less to do with the type of financing allowed but more with what the city allows you to do with the property. Depending on how the city breaks down their zoning classifications, you could add more units, convert to a Mixed use, retail, office, etc.

Sounds like this one has the potential to be a creative investment opportunity especially if location is good.

Sounds like this one has the potential to be a creative investment opportunity especially if location is good.

Dean West · Answer

@Cory Carlson @William Hochstedler @Greg Dickerson Thank you all for your valuable insight into this! I will reach out to a few more conventional lenders to see if this is something they can finance.

Fourplex Zoned as Commercial; is a Conventional Loan an Option?

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