Why would anyone get a commercial loan?

Question

I’ve been looking into how to jumpstart my business and I’m looking at every type of loan to refinance a property. I hear a lot of people say that they BRRRR with a commercial loan, but the more I look at it I can’t figure out why anyone would want to get a commercial loan. The terms seem worse in every way. Higher down pow net (if not refinancing), higher interest, often adjustable, shorter life of the loan, same cash reserves requirements at least, etc. Am I missing some advantage?

Bo McMahon · Answer

@Shaun Morgan

Shaun- I almost always use commercial loans for a few reasons:

Almost all my properties require substantial repair (on my fix and hold), my local lender allows me to be interest only for 12mo. On month 13 it turns into a 30 year loan. I closed on last week at 4.75% I pay a spread over treasury (there is a cap, just not sure what it was on this deal). This particular loan adjusts once every three years and I paid 1pt at closing but there were no “junk” bank fees. It required 20% of the purchase price but they provided 100% of the rehab funds. My first few deals with them were 25% down 20-25yr loans, most small banks will give you better terms the more business you do with them. This bank holds all loans in house. I do use Fannie loans sometimes but the ease of commercial loans is great benefit for me.

Alex Bekeza · Answer

@Shaun Morgan

Besides reaching mortgage limits like @Philip Mccleary mentioned, I've found that one of the biggest reasons investors end up going with a commercial loan product is because their DTI/Tax Returns won't qualify them for conventional financing.  Often times self employed and/or full time investors have large write offs and have to find a commercial loan because it will be "asset based."  Rather than focusing the underwriting process on the borrower they will focus it on the property itself and its ability to generate income.

Some other perks of commercial loans are flexibility in terms of: vesting title, seasoning requirements, sourcing funds, and unique properties (commercial lenders take on a lot of bank fall out from obscure properties with mixed uses, grandfather clauses, and other nuances).

Stephanie P. · Answer

The simple answer to your question is this.  You get a commercial loan when you don't qualify for conventional.

You're right, the money is:

• more expensive
• requires a larger down payment
• sometimes has shorter terms
• sometimes has to be and ARM

The commercial money works when:

• You own the property in an LLC and you want to keep it in an LLC
• Your debt ratio is crazy because you write everything and its mother off
• You can't season the funds to close
• Your partner has a credit score that kills your loan
• You own more than 10 properties and your wife won't let you get more in her name
•  Myriad other reasons to use commercial money

Commercial money is out there when conventional no longer becomes an option.

Stephanie

Chris Pflum · Answer

@Shaun Morgan a Commercial Loan can refer to a broad category of loan products that are out there.  Some of those products are going to work better for you than others, so don't get discouraged if you haven't found one that makes sense yet.

If you've got a large portfolio of properties, the typical retail products just aren't going to work for you anymore.  What you need to do is develop relationships with local credit unions, or small banks.  These are the types of entities that are going to be most likely to be able to develop a custom loan product that will serve your needs.

They've got to find solid stable investments to put their customers money into, and real estate portfolio lending can be a win/win for them and you. Talk to some loan officers from local institutions like these, share your goals with them, and see what they can come up with.

If they can't help you now, they can at least tell you what you need to do to get your real estate business to a point that they'd be able to work with you.  The best thing is you're going to get very straight answers working with lenders like this, which you just can't do working with a larger financial institutions as a small business.

Philip Mccleary · Answer

Shaun,

We use commercial products because we likely have more than 10 properties so we have no choice. They can also tie to loan into our LLC's. Yes, the rates and not good but when you grow your portfolio to a certain size its just something you need to live with

Jill F. · Answer

Any properties with more than 4 units can't be financed with a residential loan.

Commercial lenders look at the deal (DSCR) and purchaser assets rather than the DTI.

Shaun Morgan · Answer

@Robert Shedden that’s an interesting approach. Thanks for the idea!

Shaun Morgan · Answer

@Bo McMahon

Thanks, I guess I just need to talk to local banks to figure out what terms they offer.

Why would anyone get a commercial loan?

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