5-plex / 6-plex financing? Rates? Availability?

Question

A few of the properties I've been eyeing recently are 5 and 6 unit setups.  Some of these have had all of the units under one roof, and some have consisted of alternative designs (like 2 triplex units on the same lot).

I've heard repeatedly that it is hard to get more conventional style financing on buildings with more than 4 units, and I've heard that 5-6 unit buildings are often too small to get commercial style financing.

How much truth is there to all of this?

What kind of terms should I be expecting if I'm trying to get a loan on such a unit?

A few particulars that may be relevant:

1) I will not be occupying any of these units.

2) I have enough cash to go up to 50% down on any of the places I'm currently considering, though I'd prefer to stick to a 20-30% downpayment.

3) I have excellent credit.

To be able to develop a true comparison between these properties vs single family, duplex, triplex, or fourplex homes, I'd obviously need to have some idea of what financing the deal may cost.  I've been having trouble figuring out what range of interest rates I should plug into my spreadsheet when debating properties like these.  In other words, I just need a good guesstimate on:  1) the likelihood of obtaining quality financing on these types of investments.  2) An estimate of what kind of mortgage rate such a property would be likely to carry.

Thanks!

Roy N. · Answer

@Kevin  H.

Our experience coincides with that of @Brian Crowe, financing will be based on the number of units on the property (PID, TaxID, LotId, etc) regardless of the number of separate structures present.  A property we are presently exploring has ten units in three buildings and will be a commercial (or private) financing.

While the residential interest rates may be a little lower, the trade-off/benefit with commercial financing is financing will be based upon the property/deal rather than your personal income.  While this doesn't mean your personal finances can be a basket case, it does mean your DTI should not take a hit.

Here, if your deal has a Debt Coverage >=1.4 (>= 2.0 is better) and a BER < 80%, you would get commercial rates half a point over a residential mortgage rate.  If the deal were eligible for insurance (CMHC here, FHA? in the U.S.A) you could get the same rate as a residential mortgage.

We also have lenders in Canada who are writing 5-6 unit buildings as residential ... essentially, their valuation is too small to be of interest to the commercial lending departments.   Perhaps there are local/regional credit unions/banks willing to do the same in your area?

Brian Crowe · Answer

From my experience and knowledge, a property is based upon the APN # or Tax ID from local public records.  This is the designated ID number the municipality uses for property taxes.  If there are two buildings on one plotted lot with one tax ID, it should all be considered one property, ie. 6 units.  I've owned this scenario.  Also have had 6 duplexes on one lot with 1 tax ID.  This is considered a 12 unit, garden style apartment. Base your research on public record designations rather than actual mailing addresses. Also keep in mind if you buy a single duplex, unless it is owner occupied, meaning you will be living in one side, it will be hard to find rates as low as a personal residence. Its considered an investment property and those rates run higher. Always check with your banker for better info. for you, your area and the property.

Brian Crowe · Answer

Hi Kevin,

I buy, rehab, flip and/or hold 5-10 unit properties in FL.  I'm finding commercial lending to be easy at this time.  I'm looking at 5-6.5% fixed 20 yr.  80%LTV.  I'm working with BB&T, but don't think they are located in CO.  I'd reach out to your local banks.   I'm even finding my bank will waive any seasoning.  I buy private cash, rehab then refi into 6% loan at 80% and go to next property.  Best of luck.

Kevin H. · Answer

Roy,

Thanks for the insight.  It's good to have some idea of what the commercial lenders are looking for these days.  The property I'm planning to see this week looks like it would conservatively pencil out to a debt coverage ratio of 1.5, and a BER of 0.6.

Being that I'm new to this business, I'm a bit hesitant on my numbers, since I don't want to find myself on the wrong side of a bad calculation.  But, I'm pretty sure I'd arrive at that point under most circumstances I could picture (I have owned properties before, just not rentals).

Anyway, thank you all for the information!

Kevin H. · Answer

Thanks for the reply, Brian.

Question for you, or anyone else who might be reading:

If a property consists of 6 total units, but is divided into two buildings (basically two triplex units on the same lot), can I get more traditional financing rates for such an acquisition, or will I still be in a position where it is looked at as being more than 4 units?

One of the places I'm exploring is setup as I described above, with each building having a different address number (but still being part of the same lot from what I can see on the county assessor's website).

My internal debate right now is whether I should explore this property any further, or set my sights on 4-unit or smaller buildings where financing rates might be more attractive.

5-plex / 6-plex financing? Rates? Availability?

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