Do I actually need a Business Loan for this particular Rental

First-Time Home Buyer
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Do I actually need a Business Loan for this particular Rental

Hochi Yang
Member since 2022 · 17 posts · 9 votes

So my friend and I are going into Real Estate Investing as a Partnership. So him and I will be first time home buyers and we are trying to secure a SFH that is put up for sale in the UW Oshkosh college campus area. So it is currently used as a Rental Property for college students to live in. It is a 5 bedroom SFH but is being rented out to 5 college students. We are obviously trying to buy it for an investment. I went to try and get a mortgage loan through my bank which is a Credit Union and the mortgage loan officer had told me that I would have to apply for a Business Loan instead because it won't be used as a primary residential mortgage and that we won't be living in it. So I went to the Commercial Loans Department to apply for a Business Loan and at first the loan officer had told me that they don't do that there and told me to go look elsewhere. However, when I explained everything in great detail about the SFH rental property and our plans of continuing to rent it out, she started to be a little more interested and started listening. She then started explaining more about the loan process and terms and conditions. She sent me a bunch of forms to fill out via email for the Business Loan. I noticed that the forms were quite extensive and a lot of them asks a bunch of questions pertaining to your business. We don't have a business yet. We're just starting out. It seems like we might have been misunderstood and have been steered in the wrong direction unless I'm just overthinking it too much, because upon research, it seems like a Business Loan applies to Commercial buildings and this property that we are trying to secure is considered a SFH. Am I missing something here? Should I go on with the loan process? Or what are the other options? Because I could not find any information on any Real Estate Investors talking about applying for a Business Loan for a SFH. I only see conventional loans or mortgage loans. Please if anyone can clarify or give me some incite, that would be awesome. Thank you in advance! Any help is much appreciated!

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Loren Clive
Residential Real Estate Broker · Paia, HI · Member since 2016 · 479 posts · 311 votes
4y

it's better for just one person to be on the loan, if you can qualify that way, because otherwise the entire balance will count against each person on the loan, i.e. each person is jointly and severally liable for the debt. Therefore, it will be hard for any of you to get additional loans without a change in your income(s).

you need to find a good investor-friendly lender who can explain some things to you, not the credit union. 

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  • Loren Clive
    Residential Real Estate Broker · Paia, HI · Member since 2016 · 479 posts · 311 votes
    4y

    talk with some other lenders, and don't tell them so much about your plans. The best way to structure this is to inhabit one room, rent out the rest, then you could get first time homebuyer preferential rates and financing. 

    it would be better for just one of you to be on the loan.

    lenders chime in here!

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  • Hochi Yang
    OP
    Member since 2022 · 17 posts · 9 votes
    4y
    Quote from @Loren Clive:

    talk with some other lenders, and don't tell them so much about your plans. The best way to structure this is to inhabit one room, rent out the rest, then you could get first time homebuyer preferential rates and financing. 

    it would be better for just one of you to be on the loan.

    lenders chime in here!


    Thank you for the feedback Loren. The problem here is that I am married and so is my friend. So we are two couples going into partnership in Real Estate Investing and it would not be ideal for one of us couples to inhabit one room especially because it will be rented out for college students in particular. Can you or someone elaborate as to why it would be better for just one of us to be on the loan? I thought with the multiple income totals and income to debt ratio, it would gives us an advantage? Correct me if I'm wrong or maybe it's a strategy that I'm not familiar with in REI as we are still really new at this stuff. Thank you.

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  • Ty AshBusiness Member
    Real Estate Agent · Milwaukee, WI · Member since 2018 · 201 posts · 132 votes
    4y

    Hi @Hochi Yang!

    I ran into a similar situation as you when I first got my start.

    I went to a bank and said that I'd like to do a lower than 20% down mortgage for duplex that I wanted to buy and rent out the other side. They told me that kind of product doesn't exist. Turns out, that bank just didn't have what we were looking for so when we started asking around, we just found another lender who had the product we needed which ended up being an FHA loan for 3.5% down.

    Lesson learned: Sometimes vendors withhold the information hoping they can keep you in their products as opposed to just helping you out and potentially pointing you to a competitor that can serve you.

    Can you clarify if you or your partners are going to occupy the property? That will definitely determine the type of financing that you should be asking for. If you want, give me a call as I'm in Wisconsin as well and might be able to talk through some options with you!

    Otherwise, best of luck in getting your start with REI!

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  • Hochi Yang
    OP
    Member since 2022 · 17 posts · 9 votes
    4y
    Quote from @Ty Ash:

    Hi @Hochi Yang!

    I ran into a similar situation as you when I first got my start.

    I went to a bank and said that I'd like to do a lower than 20% down mortgage for duplex that I wanted to buy and rent out the other side. They told me that kind of product doesn't exist. Turns out, that bank just didn't have what we were looking for so when we started asking around, we just found another lender who had the product we needed which ended up being an FHA loan for 3.5% down.

    Lesson learned: Sometimes vendors withhold the information hoping they can keep you in their products as opposed to just helping you out and potentially pointing you to a competitor that can serve you.

    Can you clarify if you or your partners are going to occupy the property? That will definitely determine the type of financing that you should be asking for. If you want, give me a call as I'm in Wisconsin as well and might be able to talk through some options with you!

    Otherwise, best of luck in getting your start with REI!


    Thanks Ty Ash. Much appreciated. To answer your question, no, none of us will be occupying the property. We want to buy it and continue renting it out to college students on campus since we see potential in the cash flow. The owner is putting the house up for sale so we just want to take over as a start. Seems like a great way to launch our Real Estate Investing venture. 

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  • Ty AshBusiness Member
    Real Estate Agent · Milwaukee, WI · Member since 2018 · 201 posts · 132 votes
    4y

    Got it! If it's a single family residence that you're buying as an investment, you should be able to find a 25% down conventional product at a variety of different lenders. There are many other strategies you could use as well but that's the most standard of them all.

    Good luck and reach out any time!

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  • Loren Clive
    Residential Real Estate Broker · Paia, HI · Member since 2016 · 479 posts · 311 votes
    4y

    it's better for just one person to be on the loan, if you can qualify that way, because otherwise the entire balance will count against each person on the loan, i.e. each person is jointly and severally liable for the debt. Therefore, it will be hard for any of you to get additional loans without a change in your income(s).

    you need to find a good investor-friendly lender who can explain some things to you, not the credit union. 

    1Reply
  • Ty AshBusiness Member
    Real Estate Agent · Milwaukee, WI · Member since 2018 · 201 posts · 132 votes
    4y
    Quote from @Loren Clive:

    it's better for just one person to be on the loan, if you can qualify that way, because otherwise the entire balance will count against each person on the loan, i.e. each person is jointly and severally liable for the debt. Therefore, it will be hard for any of you to get additional loans without a change in your income(s).

    you need to find a good investor-friendly lender who can explain some things to you, not the credit union. 


     Agreed!

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