Buying 5 duplexes: Commercial or residential loan?

Question

I have an opportunity to buy 5 duplexes for 500K (5@100K each). I plan to 1031X two of my current properties (225K total) to make the purchase. I have talked to several lenders and am not sure the best route to take for financing.

Issue 1. If I buy all 5 at once lenders are pushing for commercial loan at higher rates. This would save money on closing costs. If I buy one at a time (close same day on all) I can get better rates but would have 5 closing costs. I think closing one at a time will save money in the long run as the rate would be 1-1.5 less. Any thoughts?

issue 2. My current two properties I plan to 1031X are in my LLc. To go conventional I would need to put them in my name and out of the LLC. This will take some time and more costs. After the closing I would want to put them back in a LLc which would cost more money again.

Option 1. Go commercial and put the 200K down across all properties at 60% LTV. I plan to go 30 yr as this is going to be cash flow for retirement.

Option 2. Buy 1 property out right for 100K and the other 4 @ 25K each. I could do conventional and get better rates but would still have the LLC issue.

Option 3. Go with a private lender, do all 5 at once, keep the LLc and try to buy down some points.

More info:

The person selling the properties manages his and about 25 others. Part of the deal is he will continue to manage them. I'm good with that as they are long long term renters and he has a good history with them. We will move to the area in about a year (I live in Ok and the properties are in MO.) Eventually, I will manage them myself. This is a private sell with no RE agent involved. Is there a way I can get comps for the properties without going through a RE agent?

I appreciate any comments or questions!

Wayne Brooks · Answer

I’d buy them individually, all at once.....the financing rate and 30 years would offset any additional closing costs, and many of the costs you’ll have will be the same anyway...title search/insurances, appraisals, recordings, etc.

@Dave Foster can comment on the exchange as far as, llc to personal name.

Dave Foster · Answer

@Guy Yoes, there's only two ways you can take advantage of conventional financing.  The first is if the LLC that you own the properties in is a disregarded entity.  That would mean that the LLC only has one member (you and your wife's tax return) and it chooses to be taxed as a sole proprietor.  It doesn't file it's own tax return and all activity of the properties are on your personal Schedule E.

If that's the case then you and the LLC are the same tax payer.  So selling as the LLC and buying as yourself would technically not be a change of taxpayer.  You'll want your accountants agreement since they would know best the status of the LLC.  And even though it might be technically possible I'd always recommend that you make the deed match as closely as possible to even avoid questions.

The other way it could work is with your lenders permission to let you sell as the LLC and buy as the LLC and then dissolve the LLC.  But that is a long shot.

So the deferred tax becomes another point of comparison with the loan savings to see which path is better for you.

Guy Yoes · Answer

Yes. They all want to offer commercial with a 5/1 arm but will carry for 30 yrs. And at I'm sure at a higher rate.

I have one offering commercial at 6.5% @ 5/1 arm. The other is conventional  at 5.75 but will need 5 closing @ $3800.00 per closing.  That's another $15K over commercial costs. It would be better to forgo commercial now so save interests later, but it gives me less equity in the note.

My numbers are roughly 500K with 200K down. With taxes and ins. in escrow it runs about $2450.00 for the payment. Management is another 600 per month. Net comes in at $2950.00 I would put back $450.00 a month until I get %5K in reserves for repairs and upgrades. They all have long term tenants and rent will go from $600 to $625 the first of the year.

Looks good on paper, but two of the structures will need a new roof within the year. That will be close to 15K (includes new trim boards and painting).

Thank you for your comment.

Ryan Struthwolf · Answer

Guy, this looks like it could be an awesome deal.

When you state the three options you're considering, you might need to rethink about Option 1. Although I haven't done a commercial deal yet, from what I've heard and read I think you'll have a hard time finding a commercial lender willing to hold a loan for 30 years. I believe all of the commercial lenders I've researched offer 30-year amortizations but with a 3-, 5- or 7-year balloons.

That's just my 2¢. Best of luck to you.

Buying 5 duplexes: Commercial or residential loan?

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