SFR: Mortgage or Commercial Loan?

Question

My wife and I are planning to (hopefully) close on a property next month in the OKC area. We have 20K set aside for a down payment. We have spoken with a lender who has tried to educate us on the pros/cons of both acquiring a traditional mortgage versus a commercial loan. The lender has told us both will require 20% down; however, the commercial loan gives us an option of folding in a renovation loan. With the commercial loan, the lender also mentioned that after 5 years, the loan would be renewed but would adjust to the interest rates at that time.

We want to start with a "win." Something that will have decent cash flow and that isn't necessarily too risky, though we understand there is inherent risk in any investment.

What are your thoughts? Should we go the route of personal mortgage at a 4% interest rate (probably finding a turnkey property), or commercial bank loan (with the rehab loan) at 5.5% interest?

Additionally, if we did a traditional mortgage, would putting this first investment property on our credit hurt our chances of getting a car loan or personal home loan down the road?

Cassi Justiz · Answer

Hey Grayson,

Something to consider is the length of the loan. Typically commercial loans are 15-20 year and conventional loans can be as long as 30. If you don't mind a longer loan term, conventional loans usually make more sense for cashflow.

I think if you have to put 20% down, you might as well do a traditional mortgage and lock in that super low interest rate for as long as possible. Rehab loans have a lot of red tape around them, so unless you are doing major renovations it's probably not worth messing with that.

Having a mortgage will impact your debt/income ratio which is what they typically look at for home loans. However, if your rental is cash flowing that should be taken into consideration by the lender.