Typical commercial terms?

7 Replies

Hey All, After a few successful single family, I’m going to be making an offer on a small multi family (7 units) next. My question: What rates / terms should I use when running the numbers? I’ve run a few scenarios and have begun reaching out to bankers but I’m wondering if you have typical rules of thumb in terms of down payment required, rate, amortization period, term, principal or interest only, etc??? I have enough cash for 20-25% down. Great credit. What rate and terms should I expect? Thanks in advance!

The deal can really dictate your lending terms but absolutely a minimum of 20% down unless you are looking to go HUD. If you have more information on the deal, I'm happy to take a look and break out what different lenders will be able to offer if you'd like. If you're looking to borrow more than $750K, we could look at a small balance agency loan such as Freddie SBL (exceptions are required below $1MM).

@Michael Mudrey Great advice on offer by @Chase Gambill . If you're working with a broker (would highly recommend that you do), they can guide you especially as they will have good, local connections. 

Alternatively, I would aim for, at least, 25% down payment + closing costs + working capital as a # to target for.

Originally posted by @Omar Khan :

@Michael Mudrey Great advice on offer by @Chase Gambill . If you're working with a broker (would highly recommend that you do), they can guide you especially as they will have good, local connections. 

Alternatively, I would aim for, at least, 25% down payment + closing costs + working capital as a # to target for.

 Aren't the commercial loan terms usually higher interest rates (6%) and 10 years?

@Jack B. Interest rates are dependent on multiple factors are not always higher than an interest rate that an individual would get on a residential property. The term can range anywhere from 1-15 years (on average) but the amortization period can be over 25-30 years. 

There are many factors that come into play. I merely provided a big-picture opinion. Your best bet would be to talk to a mortgage broker/lender.

As Chase mentioned you’ll need to be in the $1M range (loan amount) to grab the attention of national lenders. There are exceptions to this but that typically is for high net worth borrowers that have good liquidity and the property is in a good market.

Your best bet if the loan amount is under $1M is to look towards your local banks and credit unions. You’re likely looking at a 5 year deal (maybe 7) on a 20-25 year amortization schedule in the mid to high 5’s. You’ll want at least 35%-40% of the purchase price on hand, 25% down (typical minimum) and then closing costs, reserves, and some free cash in the event any unexpected immediate repairs pop up. Good luck with your acquisition!

The small stuff the big lenders do not have time for it.

Think of it this way. Your local bank might have 10 or 20 million in deposits. To them a 500k loan is big business. To the lenders that are not banks a 2 million commercial loan is small as they might loan billions a year.

Since small loans have less lenders the local banks and credit unions tend to have a niche product and corner on that market. So they tend to price accordingly with crappier lending terms. The big guys can do volume and make less spread per loan.

I have found with my commercial buyers anything below 2 million in price is extremely tough for financing and most transactions are all cash or very minimal low LTV loans. The local banks tend to know they are the only game in town for that type of stuff.

Case in point last year client buys 5.5 million retail center. Gets 30 year amort., 4.6 fixed for 10 years, 30% down, full non-recourse loan. Those are amazing terms for commercial real estate.

Conversely a smaller property without the tenant credit,location,etc. from small bank. 20 year amortization, rate in the 5's, partial to full recourse, 35% or more down,etc.  

Institutional multi-family money I would be quoting around 4.4% to 5.2% depending on property condition, property location, min. loan amt $1MM, 80% LTV, etc. Non-recourse.

Be careful painting all local lenders with the same brush. I have seen local lenders offer incredible terms but it varies greatly by area and competition. 

FYI: a bank's appetite for loans has many factors: portfolio concentration, industry expertise, availability of funds/balance sheet to lend, legal lending limit (capitalization), local competition, cost of fund, etc. 

I would recommend getting a success-based commercial mortgage broker involved. Don't pay any upfront fees and tie their compensation to your acceptance and closing of a deal.

Dan Wallace

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