SFR/small multis as commercial?

Question

Good morning BP. Wondering if someone could shed some light on a thought I had about residential investing vs. commercial. Currently I'm doing BRRRR on small multifamilies which qualify as residential but I love the way commercial valuations work with CAP rates and NOI as opposed to comps.

My question is, if I were to pull together several residential properties into a portfolio could they be treated by a lender as a commercial property where I'm better rewarded for decreasing expenses and increasing revenue? If so would it be as simple as 5 or more doors (5 sfr or 1 sfr, 1 duplex and 1 triplex) or would it need to be 5 properties?  I assume all would have be refinanced to the same loan, correct? I would see my downside as needing to sell off the entire portfolio should I divest as opposed to individual properties correct?

Thanks in advance.

Trevor

Alex Bekeza · Answer

@Trevor Finton One thing people often confused is commercial lending vs. commercial property valuations.  There are commercial loan programs for 1-4 unit resi properties that qualify the loans based on the DSCR (just like banks do on commercial PROPERTIES) however if it's a 1-4 unit residential property the VALUE will always be determined by the SALES COMPS approach.  We order a 1004/1007 or a 1025 report (if 2-4 units) and these give us 3 values; sales comps approach, rent comps/income approach, and cost to rebuild approach.  The sales comps approach is typically the exact number on the final appraised value.

There are also ways to blanket several properties together using this same UNDERWRITING approach but it does not change the APPRAISAL approach.  I hope this helps.

@Charles Carillo is correct that you typically won't see non recourse options on these until you're above a $1MM loan.  Even then, same appraisal approach on 1-4 unit residential always.

All the best,

Charles Carillo · Answer

@Trevor Finton

You could speak to a mortgage broker or your local banks about a blanket loan but we have successfully acquired agency debt on a portfolio of 3 and 4 unit properties; but for agency debt, the loan needs to be $1M+.

Trevor Finton · Answer

@Alex Bekeza, that answers my questions pretty spot on so thank you.