Advantages of a commercial loan?

Question

Hi you guys, my business partner and I have begun BRRRRing single family homes. We're about to begin refinancing and it has been suggested to us to get commercial loans instead of conventional loans.

What's the benefit of a commercial loan? (aside from no ten loan limit like with conventional)

Andrew Postell · Answer

@Matt Ferch do you know why someone told you to do a commercial loan?  I'll try to explain the difference between the two loan types below but let me know what the reasoning behind this suggestion and that might help me advise you a little better.

Generally speaking there are 2 main types of loans for investors:  “Conventional” and “Portfolio”

Conventional - I'll define these as loans that come from Fannie Mae and Freddie Mac (if you recognize those names).  These loans are all 30 year fixed rate loans.  They have the lowest rates we can find and since they are 30 year fixed...they allow us to cash flow better...which helps us qualify for other loans later. The draw back to these loans is that they are more paperwork heavy than the other "portfolio" types of loans....but if you have ever received a loan on your primary home, it's likely that you will go through the same type of paperwork here with conventional lending.  Fannie/Freddie money = Fannie/Freddie rules.  NOT the bank's own money.

Portfolio - I'll define these loans as loans that come from the bank's own "portfolio" of money.  Sometimes referred to as "commercial" loans.  These loans are a lot more flexible than "conventional" loans.  Bank's money = Bank's rules.  If they like you, then maybe they will lend to you.  But since there is a limit to how much money the bank has access to....their rate will be higher...and usually a shorter term.  The most common portfolio style loan in Texas is a 20 year adjustable rate loan.  These loans are easier to get but the terms are different.

Fannie/Freddie types of loans will be available everywhere and those rules might change SLIGHTLY between lenders.  Portfolio loans can run the gambit.  Since each lender controls it’s own money you will have to call around to ALL the banks to learn about all the programs.  A mortgage broker will help with this some…but even the best mortgage brokers don’t have access to ALL portfolio loans out there.

Anyway, hope that helps in some way.  Hit us back if you know the answer.  Thanks!

Dan Gamache · Answer

@Matt Ferch with a commercial loan you can hold title in an LLC and no personal income docs needed to qualify, and loan will not show on credit report. Rates/fees will generally be higher than conventional financing.

Cody Charfauros · Answer

We do portfolios of SFRs fairly regularly. @Dan Gamache is correct on some of the advantages. Some of the disadvantages are generally lower LTV/LTCs, higher 3rd party fees, and additional legal review requirements and fees for LLC/partnership holdings. Generally, go with conventional as long as you can.

Dan Gamache · Answer

@Matt Ferch you can go to 75% of new appraised value at 90 days of ownership

Kevin Sobilo · Answer

@Matt Ferch, a lot of VERY good responses here so far.

One additional benefit to commercial mortgages from local community banks is smaller loan amounts. Many conventional and private mortgages require something like $100k loan amounts. If you are in a lower priced market like I am that can be an issue. These local community banks will typically offer those lower loan amounts to serve the local area.

Ralph R. · Answer

@Matt Ferch  one thing I’m not seeing here that slows down many new investors is the reserves requirement  for a conventional loan. Fannie and Freddy loans require an amount of reserves for each owned property. The bank lending you the money is at liberty to set the amount higher if it chooses to do so. This usually happens when the investor has 3 or 4 conventional loans already. I had 50k in reserves and applied for a conventional loan on a second home. That was not enough reserves for this bank. I did get the loan after a fashion but had to jump through some hoops. The point is most new investors need and have some reserves, but newer investors may not have enough to cover down payments and several months payments on each property they own. Once you have met the requirement you can spend the reserves down ( down payment on another property?) but when you do that you no longer have the reserves for another conventional loan. Portfolio loans also have reserve requirements but I’ve found them to be easier to meet.   RR

Cody Charfauros · Answer

@Andre Taylor Commercial lenders will most likely use a Global Cash Flow analysis as well so it won't help you if that's the issue. @Basit Siddiqi is correct another conventional program from another lender might be able to get over it. Sometimes disclosing that difficulty up front with your loan officer can set the proper expectation for the underwriting team going in instead of that team finding a problem later. When in doubt, over-disclose and you'll have a better deal and more certainty of execution. Good luck!

Stephanie P. · Answer

@Andre Taylor

Exactly what you are experiencing is why the majority of borrowers who go to the small balance commercial loan do so. It is simply easier.

Stephanie

Andre Taylor · Answer

@Basit Siddiqi that is the next step if the underwriter comes back and deny me. It is BS...the frustrating the part is the money I'm pulling out is to pay off the leverage debt I used to renovate... I ask my lender.. why can't the underwriter removes those debts to not factor in my debt to income.... I supposed to hear something in the next day or so... I had to send them receipts of the big ticket items like the roof replacement, windows, replacement and some before and after pics. Crazy.. Im just waiting on them to ask for my soul next

Advantages of a commercial loan?

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