Why do banks keep suggesting I begin REI with commercial loans??!

15 Replies

I am working my process and meeting with local inverstors, local realtors, and lenders. Three our of three (and now an attorney) have all said that its best to put my REI properties under commercial loans. The primary reason comes back to liability, of course.

And I may be missing it but for 1-4 unit multifamily properties I know residential loans are possible. They have lower interest rates, longer terms. Which as a REI is my target for now with buy and hold properties.

Is the fear or concern of a lawsuit that strong...? I feel like I am not connecting dots somewhere. Do I need to keep searching for the right lender?

@Tre Reaume in short it makes them more money. Only fear kawsuits if your equity is above 50-100k per unit or you're a high net worth individual. Start out residential and as your equity increases move the properties into llcs.

They make more money and have less risk as they have shorter terms for their higher fixed rates. 

Just buy a cheap umbrella policy. 

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I don't like given any legal advice, but lawyers get paid to give some fear.... Many house I wouldn't but bought if I listen to a few my  lawyers.. 1-4 units 30 year loans u can do handful but u better have good financials  and u are fine, if rehab local banks constructions loans  are good too easy to get and 20m year in some states with 5 year arms...

The "Commercial" in a Commercial loan and Commercial Property mean two different thing. I'm a licensed commercial lender, but most of my loans are on residential properties. I can only lend on properties for commercial use (investments), like a flip or rental. The property could be a residential property or commercial property. The Commercial part refers to what your intention is for the property. If a buy a single family "residential" property and keep it as a rental, you'd get a commercial loan on it, like a DSCR loan or a hard money loan. A residential loan is an owner occupied loan. There are some exceptions, you can do a few "QM" loans as rentals, in that case you would be going thru a licensed residential lender.

@Tre Reaume

I'm not sure what is said in the rest of your conversations...

For example, you mentioned "liability." Usually, mostly... That means they would be recommending that you invest with a legal entity such as a LLC. Legal entities won't qualify for a conforming residential loan --- they aren't allowed to have one. You need to use commercial lending, i.e. "non-residential" loans, to finance those properties.

Also, YOU may not be able to qualify for a residential loan for what you are trying to do... Remember, only one conforming residential loan allows for non-owner occupation. Also, maybe you just don't qualify for a conforming loan. Rhetorically, what is your credit score or DTI? Lots of posters on BP ask why they can't get a loan its basically they don't qualify. Commercial loans basically don't have any set rules, they may use some of the conforming loans' criteria types, but they "make up" their own qualification standards.

Hope that helps.  Good luck.

@Tre Reaume

Here’s what most people do: Get a 1-4 unit residential loan, or 10 if they’ll give them to you. Unless doing 5+ unit buildings you can get a residential loan even as an investment property. And get an umbrella and/or commercial excess liability possibility.

I started out sticking to the "residential" loans, AKA "conventional" or "secondary market" I was attracted to the 30yr terms, fixed rates ect. I had 10 at one point but have sold (1031) or refinanced most of them into "commercial" loans. All my new loans are "commercial" now. I'm getting rates like 3.5% for 5 with 25 amort. and 80 ltv. I've even found one that's offering 2.875 right now on the same terms. That lender will also go to 10 yrs with a higher rate and the same terms (25 amort. 80 ltv. The nice thing about most of the loans I've gotten in the last 1.5 years is they have a lot lower closing costs. Some are less that $60. Not counting the title work ect. While I had some that I've paid thousands in origination and other fees. It pays to shop around. Some may be worried about interest rates going up and I expect they will but not too much. One reason they wont go too high is the governments debt would become more unsustainable than it already is. I'm still hedging my bets in a few ways. 1. Don't get over leveraged. I'm sitting at about 60% leverage right now. I'm not saying that more would be bad or what the right number is but that feels comfortable to me now. 2. Develop relationships with multiple banks. I currently have relationships with 5 local or regional banks with commercial loans. Working on a 6th. When it comes time to renew your loans or refi. If your not getting fair terms from one bank you can go to one of the others. 3. Keep on top of your cash flow. Most commercial banks use something called Debt turns ratio. Similar to DTI. If you get to much debt (personal or business) you could be denied. I put a lot of normal business expenses on cc. I almost always pay the full balance every month. I found a trick to actually pay the balance before the statement closes then it doesn't even show on my credit. Anyway, if I could do it over would I have been smarter to go commercial sooner? Maybe. Especially with all the refi's I did I would have saved a lot of closing costs. (with the right bank). Good luck with your investing!

David, thanks! Yes, you're right. They are all suggesting putting the RE into an LLC, which I do have. I want to buy and hold on cash flow properties which they have told me should go into an LLC, hence the commercial loans. Does that make sense?
I really appreciate your shared wisdom.

Marco, super helpful. Thanks! One bank locally said I could get up to 10 properties w residential loans as you said. 

Joseph, what compelled you to want to move your residential loans all over to commercial loans? So you’d prefer to do that straight away if you could do it again even though your monthly mortgage would potentially be higher?  

@Tre Reaume

Well... What do you have the LLC for? Why did you go the "route" of the LLC? Is that what you are asking me? We/BP has tons of discussions on LLC's. Its somewhere between a tossup or generally you don't need a LLC... Let me know if that's what you are asking..

Otherwise, you should understand by going hte LLC route, you lock yourself into using the LLC for everything. Otherwise, whats the point? To get the limited libabiilty protection your investments need to be done under your legal entity. Meanwhile, there are no tax benefits to investing with a legal entity unless you are investing with non-spousal partners.

So, what "they" are "suggesting" is correct. Legal entities, such as a LLC, are not eligible to obtain conforming residential loans. You have to find a commercial lender, ie any sort of 'non-residential' lender no matter what you call them or their loan products.

Does this help?

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I only moved 2 of them over I was pulling equity out and that was an more simple process and less cost. The difference with a 30 to a 25 didn't matter to me at this point. 

David, yes, my LLC is a REI company that I will grow, meaning I am not going to keep my investments as "mine". Instead, I am building a REI company. Even saying that helps me with some clarity. Along with that is a property management company I'm establishing. In that case, maybe for that clarity and streamlined process alone its best for me to put everything right into the LLC.

Very helpful! Thank you. 

I understand, Joseph. Thanks for sharing your process and your WHY.