Investor · Maui, HI · Member since 2020 · 59 posts · 20 votes
Hey BP! I am curious about obtaining a commercial mortgage as a rookie to buy my first property. My partner and I were currently in the process of obtaining a residential mortgage to buy a duplex, but my lender threw a curve ball at us, and told us that he wouldnt be able to count the rental income towards our overall income, which resulted in our DTI being too high. So, i could look for other lenders, but im curious to see if going the commercial route would be fine. The reason while i wouldnt mind going the commercial is because of the fact that they dont really "care" about your personal financials as much as residentials mortgages. And i would be able to change careers. But i am curious if it is a good idea to do as a rookie.
Has anyone else done their first deal with a commercial mortgage? how was it? and what were some obstacles? Thank you in advance for the help and tips!!
Omaha, NE · Member since 2020 · 611 posts · 665 votes
4y
Go for it. The differences in a commercial mortgage and a residential mortgage are minimal. You'll have to have a larger downpayment: 25%, usually a higher interest rate, and often but not always a shorter lending period: 20yrs is frequent.
All but two of my mortgages are commercial, and I don't even speak with the residential lending arm at my bank anymore. Not worth the hassle and extra paperwork. Plus, to make a career of real estate, especially as a rookie, you have to move way faster than the residential side allows. Best of luck!
Omaha, NE · Member since 2020 · 611 posts · 665 votes
4y
Go for it. The differences in a commercial mortgage and a residential mortgage are minimal. You'll have to have a larger downpayment: 25%, usually a higher interest rate, and often but not always a shorter lending period: 20yrs is frequent.
All but two of my mortgages are commercial, and I don't even speak with the residential lending arm at my bank anymore. Not worth the hassle and extra paperwork. Plus, to make a career of real estate, especially as a rookie, you have to move way faster than the residential side allows. Best of luck!
Realtor · Oklahoma City, OK · Member since 2021 · 44 posts · 23 votes
4y
If you already have a LLC go for it. If not get your LLC first. Commercial lenders are easy to work with they care more about the return on the property vs your personal income like you said. They still will look at your credit since you will be the guarantor however it won't be on your personal credit.
Investor · San Diego, CA · Member since 2018 · 40 posts · 21 votes
4y
@Frank Teshima, I think that sounds like a great plan. As previously said, you'll need to have an LLC. A commercial lender's "DTI" is DSCR (Debt Service Coverage Ratio) - which looks at the ratio of a properties NOI vs the annual debt service you'll be responsible for.
With all this being said, if you have an LLC, your personal credit score is good - as long as you find a good deal, a commercial lender would be happy to help you!
Realtor · Oklahoma City, OK · Member since 2021 · 44 posts · 23 votes
4y
When you choose your bank ask if they have a commercial lending department. Not all credit unions write commercial loans. No the mortgage will be in your LLC. Even if your LLC doesn't have income the lender will analyze the profitability of the property. This is where knowing your numbers and your scope of work (if you need one) really help.
Fort Worth, TX · Member since 2020 · 1k+ posts · 2k+ votes
4y
It looks like you've gotten great advice so far. I am currently working through a commercial lender because my DTI shows too high as I don't have two years of income from my rentals to show. The commercial route will allow you to jump on the great deals and have less concern of pushing your personal financial situation into being over leveraged, if that is something you are concerned about.
Investor · San Diego, CA · Member since 2018 · 40 posts · 21 votes
4y
@Frank Teshima - typically I've seen anywhere from 1.0 from smaller banks & credit unions to 1.5 from big banks.
My advice would be to form an LLC, find a deal, and send it to both a small and big bank and see what they say. If they turn you down, at the very least, ask them why and figure out what their underwriting assumptions are for DSCR. That way you can start to run THEIR numbers on deals you find.
For instance, they may assume a 10% management fee, but your local PM fee is 8%. You should be running their assumptive numbers as well in order to see if you'll qualify for their loan.
Investor · Maui, HI · Member since 2020 · 59 posts · 20 votes
4y
@Alicia Marks yeah! Thanks for the reply! That’s awesome for me too because my current job isn’t benefiting my real estate goals in any way! So I’ve been wanting to change career paths and become a loan officer. So if I’m able to go the commercial route, that would just make my situation awesome!
Investor · Maui, HI · Member since 2020 · 59 posts · 20 votes
4y
@Alicia Marks yeah, I’m in dfw but I’m not looking for hard money. My sister and I are partnering up to buy multifamily properties. But I appreciate the tip!👍🏽
Rental Property Investor · Miami Springs, FL · Member since 2016 · 25 posts · 11 votes
4y
@Karl Teshima look up on the web for Lima one capital. I just closed a loan with them for several duplexes and it went smooth. I couldn’t believe how easy it was.