FHA VS Conventional VS Commercial financing

[George Samios]

Hello everyone,

I am looking to invest in my first property but I need some advice on which way to go for the loan. The property will be probably bea multi-family 2 to 3 units and it won't be in my home state. Would I be able to get a commercial loan on the property given I put down 20%? Should I have the property in the LLC? or should take the FHA or conventional route and have good insurance? If I can put less then 20% down with an FHA loan would this make sense? Do I have to make it my primary residence?

Any advice will be greatly appreciated. 

Thanks

[Anthony Gayden]

Originally posted by @George Samios:

Hello everyone,

I am looking to invest in my first property but I need some advice on which way to go for the loan. The property will be probably bea multi-family 2 to 3 units and it won't be in my home state. Would I be able to get a commercial loan on the property given I put down 20%? Should I have the property in the LLC? or should take the FHA or conventional route and have good insurance? If I can put less then 20% down with an FHA loan would this make sense? Do I have to make it my primary residence?

Any advice will be greatly appreciated. 

Thanks

Yes, you could get a commercial loan on the property. You may need to put at least 25% down. Commercial mortgages work a little different than residential mortgages. The debt coverage service ratio (DCSR) will be a factor and you will need to have a net worth equal to the amount that you want to borrow. Also commercial mortgages generally have balloons after 5-10 years. Many commercial loans amortize over 15, 20, or 25 years instead of the 30 years which is standard in a conventional residential mortgage. The commercial loans generally have lower interest rates and you might even be able to get an interest-only period. You also will be able to purchase your property with your LLC.

You could also purchase using a conventional residential mortgage. For a non-owner occupied loan most places will require 25% down for 2-4 units. The good news is that you will be able to get a fixed interest rate for 30 years. You probably will not be able to purchase the property with an LLC, however you can transfer ownership to your LLC later using a quit claim deed.

You stated that the property won't be in your home state so I am assuming that you won't live there, so an FHA mortgage is off the table.

It is not necessary to purchase the property with an LLC and a good umbrellas insurance policy will work in many cases. I personally own many rental properties and they are all in my personal name. I do have a commercial umbrella insurance policy and regardless of whether you have an LLC or not, I recommend one for your rentals.