Newbie advice on financing a medium size multi-family (7 units)

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Newbie advice on financing a medium size multi-family (7 units)

Brianna Jackson
Houston, TX · Member since 2018 · 20 posts · 14 votes

So I've been watching a property from a distance (I am not currently in the area) and it has kept my attention. My initial plan was to house hack with my va loan; however, this is looking like a great deal if I could get it for an ideal price (it has been on the market for over 2 mos and I just received word that the condition is considered "poor" as there haven't been any upgrades in a decade and it's looking to be in a B-/C area...so I'm hoping to knock the price down significantly...any advice on this would be appreciated as well!). The snag I'm running into now is that I obviously can't use my va loan because it's more than 4 units (It's actually several units and a house) so now I am moving into the commercial loan play area. Any suggestions on the best way to navigate and finance this deal? I still wouldn't mind house hacking it....but how does that work when it's a commercial size property? Are there any loans where I could claim primary residence (and possibly receive fixer upper funding like a 203k) of a commercial sized property? Any advice would be appreciated :) 

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Andrew PostellPro Member
Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
8y

@Brianna Jackson this property will not be available for any type of "primary home loan". No FHA, VA, USDA, etc. All of those loans are for 1-4 unit properties. For commercial/multi-family lending you might get more of a response in the "Multi-Family" forum....or maybe the "commercial" forums...but those loans are drastically different. You will probably need 20% down at a MINIMUM for those loan types.

As a former Marine, I wish more veterans would use that VA loan for 2-4 unit properties. It's the best loan, no PMI, no downpayment, and in Texas if you are disabled they will even cut your property taxes. There's also Texas Veteran Land Board too. Just brainstorming here. If there's any other questions you have feel free to tag me and I'll answer them right away. Thanks!

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  • Tabarus Barton
    Member since 2018 · 10 posts · 0 votes
    8y

    Have you heard of a FHA Loan? My buddy told me thats a great loan for house hacking.

    0Reply
  • Andrew PostellPro Member
    Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
    8y

    @Brianna Jackson this property will not be available for any type of "primary home loan". No FHA, VA, USDA, etc. All of those loans are for 1-4 unit properties. For commercial/multi-family lending you might get more of a response in the "Multi-Family" forum....or maybe the "commercial" forums...but those loans are drastically different. You will probably need 20% down at a MINIMUM for those loan types.

    As a former Marine, I wish more veterans would use that VA loan for 2-4 unit properties. It's the best loan, no PMI, no downpayment, and in Texas if you are disabled they will even cut your property taxes. There's also Texas Veteran Land Board too. Just brainstorming here. If there's any other questions you have feel free to tag me and I'll answer them right away. Thanks!

    2Reply
  • Brianna Jackson
    OP
    Houston, TX · Member since 2018 · 20 posts · 14 votes
    8y
    Originally posted by @Andrew Postell:

    @Brianna Jackson this property will not be available for any type of "primary home loan". No FHA, VA, USDA, etc. All of those loans are for 1-4 unit properties. For commercial/multi-family lending you might get more of a response in the "Multi-Family" forum....or maybe the "commercial" forums...but those loans are drastically different. You will probably need 20% down at a MINIMUM for those loan types.

    As a former Marine, I wish more veterans would use that VA loan for 2-4 unit properties. It's the best loan, no PMI, no downpayment, and in Texas if you are disabled they will even cut your property taxes. There's also Texas Veteran Land Board too. Just brainstorming here. If there's any other questions you have feel free to tag me and I'll answer them right away. Thanks!

    I definitely plan to use my va loan...and was planning to use it for my 1st property...but if I can get this property in the position that I want it....I'll go for it....I have the downpayment...really just want to see what the best loan option may be for it. Sucks that their aren't any loans similar to a 203k for medium sized residential buildings :( We're not talking 20+....just a few more than 4. But it is what it is for now...perhaps they'll extend it in the future. As for my va loan it will will always be there (hopefully!) and I'm definitely looking forward to using it when I can (perhaps my next multiunit :) ) 

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  • Brianna Jackson
    OP
    Houston, TX · Member since 2018 · 20 posts · 14 votes
    8y
    Originally posted by @Tabarus Barton:

    Have you heard of a FHA Loan? My buddy told me thats a great loan for house hacking.

    I have, but because it is a commercial sized building it does not qualify for an FHA loan

    0Reply
  • Tim Milazzo
    Lender · New Smyrna Beach, FL · Member since 2017 · 122 posts · 54 votes
    8y

    Hi @Brianna Jackson,

     I'm a commercial financing professional, and we can chat directly at some point if it would be helpful, but I'd like to add a couple more quick points here:

    1. House hacking on a commercial loan is generally not a good idea. With a commercial loan from a bank or credit union here you'd be required to maintain a Minimum DSCR (Debt Service Coverage Ratio).

    Let's say the bank tells you that you must maintain a 1.30x DSCR, not uncommon for a small multifamily loan like this. That means that the NOI (Net Operating Income) of the entire property needs to be at least 30% higher than your loan payment each month. If you take away the rental income from one of the seven units, it's going to be really hard to make those numbers work unless you're buying at a very high cap rate. If you can't get a long amortization period (25-30 years), this will be even tighter.

    2. Down payments on commercial properties are bigger, particularly for smaller properties, and particularly for new investors. Definitely don't expect 20%, think 30-40% down payment.

    2Reply
  • Brianna Jackson
    OP
    Houston, TX · Member since 2018 · 20 posts · 14 votes
    8y
    Originally posted by @Tim Milazzo:

    Hi @Brianna Jackson,

     I'm a commercial financing professional, and we can chat directly at some point if it would be helpful, but I'd like to add a couple more quick points here:

    1. House hacking on a commercial loan is generally not a good idea. With a commercial loan from a bank or credit union here you'd be required to maintain a Minimum DSCR (Debt Service Coverage Ratio).

    Let's say the bank tells you that you must maintain a 1.30x DSCR, not uncommon for a small multifamily loan like this. That means that the NOI (Net Operating Income) of the entire property needs to be at least 30% higher than your loan payment each month. If you take away the rental income from one of the seven units, it's going to be really hard to make those numbers work unless you're buying at a very high cap rate. If you can't get a long amortization period (25-30 years), this will be even tighter.

    2. Down payments on commercial properties are bigger, particularly for smaller properties, and particularly for new investors. Definitely don't expect 20%, think 30-40% down payment.

    @tim millazo It's great you mentioned that first point because I was thinking that staying in the house (6 unit 1 house) would take away a good chunk of what I could be making and you're reasoning is sound...thanks for mentioning that! I will keep my options open and probably scale back into residential until I build my pockets some for a heftier downpayment  

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