Financing a 5-plex - commercial loan?

Question

Hi BP'ers!

I ran across an MLS for a 5-plex today that is 4 1-bedroom units with a 3 bedroom/3bath attached on the backside and listed as a townhome. I have been speaking with my mortgage broker to see if there's any way to finance this, but she is very pessimistic. I have never done a commercial loan so I'm not sure what's involved and I'd like to get some other feedback on this. She says interest rates are much higher on commercial loans, that I might need as large as a 50% down payment, and then show proof of operating funds in a huge amount, etc etc. We are small timers and were actually hoping to do our next deal as a house hack with an FHA. Should I just move on from this or is there any way to finance this more like an FHA?

Jason Chen · Answer

Find someone more competent.

Also, let's talk about the elephant in the room: the fact that 4 of the units are only 1 bedroom. I would want a 2 bedroom/1bathroom, as those are way more easily rentable and marketable than a 1 bedroom. I don't even like this deal in the first place, unless you're getting it for an insane price.

Jared Bouzek · Answer

@Catherine Peters As indicated above, your loan officer is being pretty dramatic about commercial loans. Most likely because she can't do them. Yes the rates are slightly higher than residential with shorter amortizations and ARMs/balloons, but I've never seen them requiring a 50% down payment. One thing you might run into at least here in the Denver area is a lot of commercial lenders have minimum loan amounts of $1MM. I only know of a few who will dip down to $500k for the right client.

Daniel Dietz · Answer

@Catherine Peters in our area we can get commercial loans with 20% down, 5.125% amortized over 25 years with rate locked for 10 years. After 10 years it can go up a max of 1% per year to a max of 11.125% Now that we have done a couple with them, we can do 10% down of our own funds if we find an owner or private lender that is willing to do the other 10%. We can do these for anything from a SFH that is non owner occupied up to 5M dollars.

Dan Dietz

Stuart Crowell · Answer

@Catherine Peters I'm helping a few clients through the process of closing on an 8 plex in SW Denver at the moment. They were very new to the commercial process but had done several B&H Residential purchases over the last 4 years. What I've learned is it's all about the lender. In my experience, some commercial lenders don't lend on "small" projects like this. However, we were able to pin down a commercial broker who is getting them in at 20%, ~5.00 IR, 30yr (echoing some of the thoughts above). I would be happy to put you in touch with him, just DM me :).

Best,

Stu

Daniel Dietz · Answer

@Catherine Peters it shows up on the second section of the report from the Rental Calculator under 'Financial Info'. I guess they call is Debt Coverage Ratio but it is also referred to as Debt Service Coverage Ratio. Here is how Wiki explains it

https://en.wikipedia.org/wiki/Debt_service_coverag...

Essentially it means if you have a "1.36" ratio, you have 1.36 times as much as you need from your Net Operating Income to pay the 'debt', usually a mortgage in the rental world. Think you have $1360 of NOI to pay a $1000 debt or payment.

Dan Dietz

Jared Bouzek · Answer

@Catherine Peters I stick to residential. I refer out commercial typically.

Jason Chen · Answer

the 1 bedroom thing isnt a problem then

Catherine Peters · Answer

@Jason Chen the 1 bedrooms all come with their own garage which to me is a HUGE selling feature and there are lots of young singles in this area. Cash flow would be great, and that's hard to find in the Denver market. But only if the financing is right, so I think this is probably not going to be a fit for us.  I agree with you - just not sure how to find someone better who has the patience to deal with my newness to the game - I ask her a TON of questions and take up a lot of her time.

@Jared Bouzek thanks for the info. This is a $650K deal so maybe my broker was right in that it would be an incredibly difficult loan to get done. I see you're a lender in Denver. Do you just do commercial?

@Daniel Dietz forgive my ignorance but what is DSCR? I use the BP rental calculator, but please point me in the right direction as I must not be paying attention to this :)

Daniel Dietz · Answer

@Catherine Peters, even thought conventional is usually the way to go, there are other reasons.

Some of ours are held by a 3 way LLC, and LLC loans typically have to be non-conventional. I think that holds true even for a single member LLC, but am not sure.

Another reason is DTI ratio's. In the commercial lenders world, they dont really care about that, as long as the numbers make sense. They are usually looking for a DSCR (that shows up on the BP Rental Calculator) of 1.20 or better. They also, if you have some experience with land-lording, count 100% of expected rents less a vacancy factor (5% in our case).

Also, now that we have done a few with them, will let us put down 10% of our own money and mix that with 10% (or more) from a seller carry or private lender. I *think* that would kick in PMI on a conventional.

But one of the biggest things is the ease of the process. I was at a property auction a few months ago, ran the numbers on my phone on the BP Calculator and came up with a DSCR of 1.4 - very solid. Called my banker, and said "Im thinking 90K max bid, here's the rent, I have this much down, can we do this?" Without hesitation he said yes as long as the appraisal come in OK (I knew it would) We did not get the bid on that one, but if we had we would have needed to put 5K non refundable earnest money down THAT day -..... you want a lender that is simple to deal with :-)

Good luck, Dan Dietz

Greg Downey · Answer

@Catherine Peters. Residential lending terms are just plain better. That is why the crew isn't saying that a 4plex might be a good option because you would be eligible for residential terms. Anything with 5 or more units MUST be a commercial loan. I would not agree that you would meet to come up with 50% LTV unless your lending profile is horrible. Typically you need at least 25% down to get the loan. Hope that helps

Financing a 5-plex - commercial loan?

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