Financing 5 unit MFH - what are my options?

Question

My understanding is that a 5 unit property will not qualify for convetional financing (FNMA only for 1-4 units).

What options do I have then if I have good credit, can put down a good & and only have three properties?

Jon Holdman · Answer

A loan with terms "30/3" means it has a 30 year amortization period but the loan is due in three years.  When you compute the monthly payment, you use the amortization period, 30 years.  So, on a $200K loan at 6% for a 30/3 loan, your payment would be $1,199.10.

After three years, you have to pay off the loan.  After three years is you make the scheduled payment, you will still owe $198,790.36.  You will either need to sell or refinance the property, assuming you can't just come up with the cash.

If you can't sell, can't refi, can't come up with the cash and the lender won't extend the loan, they will foreclose and take your property.  These loans can be recourse or non-recouse.  If it's non-recourse, they take the property and that's the end of the story.  If its recourse, and there is a shortage (you're underwater), they will come after you personally for the shortage.

A loan like 10/10 means ten year amortization period, due in 10.  In other words, a fully amortized loan.  That same $200K, 6% loan would have payments of $2,220.41 but would be paid off after 10 years.

Joel Owens · Answer

"These loans can be recourse or non-recourse. If it's non-recourse, they take the property and that's the end of the story. If its recourse, and there is a shortage (you're underwater), they will come after you personally for the shortage."

I would add that you have loan docs analyzed by a real estate litigation attorney before signing.Even though some loans are considered non-recourse they have "bad-boy" or "carve-out" provisions in there where you are still liable.

So don't think "non-recourse" and I am off the hook.You have to understand what's truly at stake when buying a property and what lender you are working with.

Darryl Dahlen · Answer

If you've been through the loan process before for a residential property, something as small as a 5-unit isn't going to be all that different of an experience.

The appraisal will cost more and the lender will want to see financials on the property, rent roll, YTD P&L, copies of leases, etc. Since most of the items will be things the seller will have to provide, it won't mean all that much added work for you.

This is the type of deal a local credit union or bank should be able to handle no problem. I'd have a sit down with the commercial loan officer at your bank and run this by them to get their feedback.

Ask what sort of terms they can offer for this type of property, the estimated lender/3rd party fees, underwriting times, and a list of documents they will require.

That should give you a good baseline for what you'll need to provide them and what you can expect in return.

Damon J. · Answer

So assuming 5 units that means I need a commercial loan.

I have no experience in this arena, whet should I expect in comparsino to conventional financing?

Aksel A. · Answer

Resurrecting this thread for a similar situation here. Some info about the deal:

Background

5 Unit MFH in a suburban area

Goal is to occupy one of the 5 Units as a 1st time home buyer.

Property overall in good condition, no liens, no hidden surprises

Numbers

Listed price 300K

Good condition, 5K repairs

Average rent: 800 per studio

Insurance: $2200

Tax: $4000

Cashflow

The following numbers were done using Residential financing 20% down at 4.5% interest on 30:

Monthly cashflow as owner occupying and non property mgmt: $300

Monthly cashflow as pure investment with 10% property mgmt: $1200

Latest Update

Good side: House is almost under contract.

Bad side: All of my 3 residential conventional lenders backed out at the last moment after learning this was a 5 unit property.

In summary, we have a great deal, but no financing.

Any recommendation on how to approach commercial lenders on this case? Much appreciated.

Michael Norris · Answer

David, by chance have you thought about a renovating the 5- unit into a 4-unit? By doing this you will be in residential status.

I am sure you have heard about the 203K/ FHA loan benefits, a 203K would be great here in this instance.

David Lecko · Answer

Hi all, I know this forum is 4 years old but it seems the most relevant for me to ask about financing 5-unit properties.

@Damon J.great observation that some 5-unit properties are registered with the county as < 5 units. Example in Indianapolis: 55 S Aududon, 46219 has 5 units & 5 mail boxes. However the assessor's property card shows as a duplex.

@Darryl Dahlenlooking for your expertise as a commercial lender. What financing route do I use for this property (traditional mortgage or commercial)?

George P. · Answer

Darryl, looked on your site and noticed the rate terms. how does that work exactly?

for example, i can get a fixed 30 yrs on a personal loan and it wont change for 30 yrs. in comparison, under the "fixed" rate you have: 5/5, 10/10, 15/15, 25 due in 10, and 30 due in 5, and 30 due in 3.

let's say i pick 15/15, does that mean that the loan is due in 15 yrs? or it means i need to refinance again in 15 yrs?

How can a $200k loan be due in 3 yrs (if you look at the 30/3 program)? what if you are upside down, like most SFR are right now?  Then you can't refi and lose the apartment.

Let me know, please. I am interested in learning how the 5+ works.

thanks

George P. · Answer

i am interested in a 5 unit property as well. but i heard that the rates are much higher and you have to put 40% down for something like that. Not sure how much higher the rates are, but the larger down payment is what's difficult to achieve most of the time.

Damon J. · Answer

I have found that there is quite a bit of inconsistency between actual # of units and what is listed by the city and by the county. So trying to understand the source that the bank would use.

@Greg - thanks for the info. Assume this is the county property tax rate card?

Financing 5 unit MFH - what are my options?

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