Dipping toes into commercial multi-family - how does lending work?

Question

I have two 3-family homes and 1 duplex, none of which trigger the commercial loan requirement. I am interested in going bigger - anywhere from 5-12 units, and anywhere from one building or multiple homes. I understand anything above 4 units will require a commercial loan. As I navigate the numbers, I would like to understand current rates with 25% down. I also understand there are DSCR options but not certain I want to go that route. I prefer 30 yr fixed so I can have some level of certainty while I get accustomed to the larger properties and the caveats that comes with, but not sure I could get a 30 yr fixed. I also have managed warehouses and considering purchasing a warehouse or storage facility so if lending also differs for that, could you please let me know?

Aside from that... I would like to reiterate my main question which is: what should I factor in my underwriting for interest rates? I have high 800's credit score and prefer 0 points. I have a preference to investing in texas but looking all over the red states. Thanks everyone!

Javed Hussain · Answer

For commercial I always go with commercial brokers as the terms and rates always end up better than just shopping around at commercial banks. Plus with a broker you can explore alot mor flexible terms which seems to be what you are going for if you want a longer fixed term.

Caroline Gerardo · Answer

"cannot make the grade"= when the investor got a loan back in 2019 the rate was 4 and now at 8 -10 the rents no longer cover the payments. When you price out the Principle interest taxes insurance and any HOA the rents in most states won't cover the payment unless you have BIG down payment or equity. There is no personal loan for non owner.Loans are organized like this for non owners:1-4 can be a conventional or government backed or DSCR or bank statement loan- lots of variety in products. These are the lowest rates. 4-8 can be DSCR, bank statement or asset depletion Non QM loan8-20 difficult to place as commercial lenders have minimum loan amounts and costs jump with commercial appraisals starting at $4000 but 8-500+ is commercial loan. These are often only for 5 or 7 years and you have to requalify for a new loan at the end of 5 or 7.Most loans are full recourse.People ask about no recourse for SIDRA etc. There are three or four lenders doing them with huge down payment and the highest rates.Rate depends on property type, your FICO, equity/down payment, number units, qualifying type...

Erik Estrada · Answer

If you have a preference paying 0 points, you will need to establish a relationship with a commercial bank that is a perfect fit for your investing track record and background. Chase bank offers very competitive commercial rates, with minimal fees and a $500k minimum loan amount.

Caroline Gerardo · Answer

Under 8 units a 30 year fixed is available.Over 8 the terms change and are often due in 5 or 7 years= commercial. Commercial loans are larger sales prices.

Simmy Ahluwalia · Answer

@Selina Giarla - yes, dscr is available for up to 24 doors. If your loan amount is less than $1M, then you are looking at rates in the 7's/8's fixed. If your loan amount is greater than $1M, then rates most likely in the 6's fixed. However this last option will be a 10 year fixed loan.

Tyler Warrick · Answer

Hi @Selina Giarla, great questions.I want to clarify that DSCR loans have 30 year fixed rate options (as well as ARMs, IO, 40 year terms etc.). Assuming 800 credit, and 25% down, 5-8 unit: a no point DSCR loan could be in the high 8s/low 9s.

Erik Estrada · Answer

On 5-20 Unit, the DSCR ratio is 1.25 minimum and above. Lenders will also factor maintenance costs, utilities, and other expenses into the calculation. Depending on the bank, they may also require you qualify with a 1.20 Global cashflow. They will look at your personal and business income, debts, and property DSCR to calculate this. There are lenders that offer a DSCR only loan, however the minimum loan amounts are higher, usually a $1 mil or more.

Selina Giarla · Answer

So there are personal and commercial DSCR loans? Whats the difference?Also, not following about "cannot make the grade at 8%"?

Caroline Gerardo · Answer

You make it based on lease and what the appraiser determines is market rent minus a factor. You only need to qualify to close the loan. If is a commercial loan you have to keep the rents there in five years when the loan is due, assuming rates are the same or better. For example: Right now an investor whose commercial multi family qualified at 4 % in 2019 maybe cannot make the grade at 8% today so that investor would need to pay the loan down with cash to qualify or sell.

Selina Giarla · Answer

Thank you all very much. With the DSCR... what happens if I can't make the ratio month over month (ie: vacancy drops for a period.)