7 Unit Multi family as first investment property

[Roger Brogan]

After looking at several SFH, I have yet to find one to purchase for a rental that would be profitable in my area.

As a result, I expanded my search to my hometown which is about an hour away and have found a 7 unit multi family apartment that looks good on paper. I know this would need a commercial loan, which I am not familiar with what so ever, and it would be my first investment property located 1 hr away, I am very reluctant to make a move on it. How different is the commercial loan process than the residential one? How much higher will the rates be compared to a SFH? Will I need more than 20% down for a commercial prop?

I will take all the advice as I can get. Thank you!

[Erik W.]

Hi @Roger Brogan, welcome to BP!

Commercial loans are different from conventional in several ways:

1) They are typically not fixed rate for the entire term of the loan.  There will be a lock period up front where the interest rate won't change, and that can range anywhere from 1 - 10 years.  The ones I typically see are 3, 5, or 7 years.  The longer the lock, the higher the initial rate.  But not much.  Maybe 1% difference.  After that, you can either refinance and lock it again or pay the new rate.

2) The rate itself isn't much higher than 15 or 30 year fixed rate conventional.  Maybe 1-1.5%.  Right now, I'm refinancing into 5% rates.  Last month was 4.75%.

3) The term itself can vary as needed.  I normally do 15-year notes because I want rapid principle pay down.  But one time my banker's assistance goofed and thought it was the payment amount we wanted to be a round number, so we ended up setting the payment vs. the term.  So I got a 157 month note at a nice round payment.  Hey whatever...it's less than 15 years (180 months) but the payment wasn't much higher.  We went with it.  20 years amortization is typically the max, though I have seen some go 25 year on occasion.

4) Less paperwork up front, but your bank may require you to submit yearly PFS (personal financial statements, pronounced "PIFFS") listing all of your assets, accounts, real estate owned, loans owed, etc.  This is to ensure you are stable.

5) They may have "calls", meaning if the bank for whatever reason decides they no longer want to carry your note, they can "call" the entire loan due immediately.  Avoid these like the plague.  It's worse than a balloon.  At least with a balloon note you know the day the call will happen and can prepare for it.  I don't like any kind of note that can have the entire balance due in 30 days.

6) Down payment is typically 20%, but some lenders wanting to build up a book of business will go lower and/or allow the Seller to carry the 20%.  Some will demand 20% of YOUR funds: they want you to have some skin in the game.

In summary, commercial lending is as flexible as you and your lender want it to be.  It's not quite the "wild west" of lending, but it is open to a lot of creativity.  I'm of the opinion that if your deal won't work with a 15 year term it's probably not a good enough deal, unless you get up into the non-recourse notes for medium and large apartments.  Then the game totally changes, but that's another post.