Commercial loan question!

5 Replies

Hi, I am learning about commercial loan terms and will meet with a lender on Monday. Hope someone could answer some basic questions I have!

1. People on the forum mostly talk about short-term fixed rate loan for 5-7 yr with a 20-25 yr amortization. This means one has to refi every few years? So I have to budget for refi cost when analyze a property? 

2. Is long-term fixed-rate not an option? I was looking at Fannie Mae small multi-family loan. Is that difficult to get because of specific requirement, like high occupancy rate? 

3. People say the best rate comes from local bank. I invest out of state - does this mean I talk with local lenders where the property is located or where I am located? 

4. Any important questions to ask the lender? Like their fee, etc?

5. For residential, I know the maximum loan I can take out. Does it work this way for commercial loan? I ask because for commercial loan lender needs to know NOI, which is property specific.


@Chase Gu

1-4 family properties are considered residential. You can get a FHA or a conventional loan on those.

5+ unit properties are considered commercial loans.

Commercial loans do not have a secondary market for the lenders to sell their loans at the end of the month. That means they have to keep them on their balance sheets. Longer terms means more risk to the lender, so longer terms means they'll have to charge higher interest rates to make up for the risk. At the end of each term period the lender will evaluate the progress of the loan and reset it for the next period and reset the interest rate to whatever the prevailing rates are at that time.

You should generally get a loan with a lender in the same state as the property.

Commercial loans don't have the same level of regulation like residential loans. So, you'll need to discuss with each lender about their terms, fees, and what they'll need for loan applications.

@Chase Gu - Fannie/Freddie are securitized and sold in the secondary market so they are able to go out longer than banks. A 10 year agency deal is much cheaper than a 5 year right now, so its kind of counter intuitive from a bank's perspective. They can even go to a 15, 20 or 30 year term, all on a 30 year amortization. Standard requirements are 90% occupancy for 3 months, a 1:1 net worth to loan request, and 10% of the loan amount in liquidity. You'll also need a $1mm+ loan amount and experience in investing in multifamily, especially if you're not local to the property. Let me know if you have any other questions.   

@Chase Gu - There are many commercial loan options for 1-4 unit properties.  Most have fixed periods of 5 or 7 years.  Usually they are 30 year am.  Some balloon and some just become ARMs.  There are options for 30 year fixed rates, but those will be in the 7-9% range.

But yes, there are options.

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