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Updated about 5 years ago on . Most recent reply
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Financing 5+ Unit vs. 1-4 Unit Apartment Buildings
Hi All,
This is a very basic question, as I am relatively inexperienced with REI. How different are typical mortgage terms for 5+ unit apartment buildings compared with 1-4 unit? I have owned two 2-family homes, so I am familiar with the typical mortgage terms for that type of small apartment building, but I know next to nothing about 5+. I am trying to decide whether to buy a 1-4 unit or a 5+ unit as my next purchase, but I am just starting to educate myself about these slightly larger buildings. I may try to buy a 5 or 6/7-unit building, but not if the loan terms are dramatically less favorable. For example, are interest rates typically far higher? And, if typical loan terms are typically far higher for these slightly bigger buildings, are there other financial advantages to buying, say, a 6-unit vs a 3 or 4 unit that would outweigh the disadvantages? Lastly, can anyone recommend any resources that I could use to educate myself regarding such basics? Thank you for any insights!
- Karl
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Yes Karl, the SFR small MF's have more favorable terms. With commercial lending for that size building, you may be looking at a 20 or 25 year amortization with a balloon payment due at the end of a fixed term like 7 or 10 years. It is not as set it and forget it as single family. Interest rates will be higher. I would check with a local bank. There is a huge positive though with commercial. If you increase the NOI by either increasing rents or reducing expenses, you increase the buildings value, and you can literally take that to the bank (and get a nice tax-free refi). You run a commercial property like a small business, and you can manually force it's appreciation, and not be subject to the whims of market appreciation, as you are with the single family market. "The ABC's of Real Estate Investing," by Ken McElroy would be a good place to start.