financing 5 unit properties, how different than 2-4 units?

Question

Looking to buy my first rental property.  Have around 80k or so I can utilize for a down payment. I've mostly looked at 4 unit or less properties.  I have seen a couple 5 and 6 unit properties that have sparked my interest.

How do the underwriting standards change once you get larger than four units? I.e. what type of down payment, loan term, interest rate could I expect?

Is there a particular type of bank anyone would suggest targeting? E.g. credit union, mid-size, large, etc.?

I appreciate any advice that could be offered.  I apologize if this question has been asked before.  I did try running some searches and couldn't find anything.

Ann Bellamy · Answer

Commercial financing is a totally different animal from residential 1-4 unit financing.  There are some similarities, but in general, commercial financing focuses most on the experience level of the borrower in the type of real estate being financed, and the financials of the building.

Then secondarily they look at the metrics of the borrower, such as fico, etc.

If you have never owned and managed a multi, by definition you are going to have trouble showing
1.  Your experience
2.  The financials and projected income and expense, because you don't know what you don't know

In addition, all the soft costs for closing are more expensive for commercial.  For example, instead of 300-500 for an appraisal, you can easily start at 2000 and up.  Phase I environmentals  will be required, sometimes Phase II, and the engineering and inspection reports are big bucks.  I once paid $2000 for a required fire system inspection. (Required by the bank)

Financing is more expensive, and the rates are typically only priced for 5 years for buildings in the 5-12 unit range.  So you are at risk every 5 years for interest rate hikes.

Insurance takes you into Business Owner Policy territory instead of just NOO investor property.  Also more expensive.

Your mistakes in a larger building are going to be multiplied also.  For example a mistake costing $2000 per unit in a duplex will cost you $4000.  In a 6 unit that could be $12,000.

So I strongly recommend that you first jump into the shallow end of the pool.  Get a 2 or 3 unit, deal with that, make your mistakes and learn from them.  Learn all you can about the financials and projections, and how to value add and manage tenants.  Then get another.

My recommended reading:  Real Estate Investments and How to Make Them.  Milt Tanzer

John Buzzard · Answer

wells fargo bref program for small commercial loans,50k to 700k.for 5 unit and up apartments

20% down

6% interest on a 15yr

Loan cost is only 1%........ no apraisal or closing cost. Great deal on properties under 150k

Kurt K. · Answer

I just bought a 6-unit. Commercial lenders would only give me 3 year balloon loans for commercial property. They offered a decent rate in the 5-6% range. I didn't like the idea of having to refinance that often so...

Consequently, I talked the seller into seller financing at reasonable terms, and we managed to get the deal done.

Andy Bankston · Answer

Erik Reichertz, I could be wrong, but I believe anything 5 units or higher requires a commercial loan, which is a different animal than regular residential loans for 4 units and under.  If that's the case, the financials/specifics may vary from lender to lender. I'm hoping someone more knowledgeable comes along and can offer more details as I'd like to know myself.

Igor S. · Answer

If possible, see if you can work with the bank the building is currently financed under.  I am closing on a deal in a few weeks this way.  Saves on a lot of costs, especially if dealing with a local bank.  They already know the building, have the history behind it, know what to expect, etc.

Current rates here are: 
3yr 4.25%
4yr 4.75%
5yr 5.25%

George P. · Answer

ann, that was very informative... thank u.

Joel Owens · Answer

For out of state or out of the country investors I do not recommend the smaller type buildings ( example 5 to 20 units ).

Management the deal is so small the company has divided interest managing other clients to hit their income levels they need to survive. Same goes with a maintenance person is that really you can't afford a full time one baked into the costs. So when a problem occurs they may be available or they may not doing other jobs to get by. This is why I like larger buildings as the proper infrastructure can be put in place for the property to run itself and not create a job for yourself.

Now those types who want to do everything themselves and live local then sure go after a 6 unit or 8 unit etc. I also like the larger complexes because you can control the whole look and feel of the development versus the smaller buildings you are usually dealing with other owners around you who might be affecting the performance of your property in a negative way and you have no control over what they do.

There is not as much financing for these types of units as most lenders consider it small potatoes and would rather do larger loans and less volume. Think of it like I am a commercial broker and do I want to do 100 100,000 sales price transactions or 3   3,500,000 transactions??

My time is better spent on bigger transactions and I increase my ROI.

National apartment lenders want certain properties such as population levels above 80,000, door price above 40,000 a door, age of the building past a certain year, location urban core to some suburban to minimize risk.

When you get into more suburban to rural areas where deals can be had you are dealing with more local to regional banks who have a presence their and are comfortable lending in those micro markets. So when I talk to my clients I tell them financing will depend on where the property is for loan purposes and it's a case by case basis. This is why lenders want to know where the property is to see if it's something they are interested in funding or not on any level.

Derrick Moore · Answer

If its multifamily 5 units and above is listed as commercial. . However 4 units and below all multifamily- is resi! 
Terms you are looking at would be 5,7,10, 15, 20 or 30 years. 
DP- sorry down payment - 20-25% but credit score varies with different institutions- 680 from some lenders and some I heard 700. 
Rates that's out there now for just multifamily I have seen 3-4.25% for multifamily 
But also underwriting is different an institution would want to see your net worth, liquidity, borrowers financial statement. 
Why -Can the borrower carry that note. 
Building up from small to large is always good, it helps build that relationship with the lender.

Joshua Roy · Answer

I’ve read that investors usually pursue seller financing when the target property doesn’t have a mortgage.  This is to avoid potential risk with the due on sale clause.  Does this also apply to commercial properties?

Kurt K. · Answer

Similar to what banks offer. But sellers can be negotiated with easier than the bank. I got the same interest rate from the seller but a longer term.

financing 5 unit properties, how different than 2-4 units?

Most Popular Reply