5 Units Being the Cut-off Between Residential and Commercial...

5 Replies

What exactly does it mean that 5 units is the minimum to place a commercial loan on an asset? I ask becuase I have a little redevelopment project I am doing: two houses are being turned into one duplex and one rental (total of 3) and two mobile homes (total of 2). Does that equal 5? Or does that duplex really count as one, and therefore we need to tack on one more mobile home to reach five?

It’s number of units/doors.  So you described a mixed 5 unit commercial, that is if it is all on the same plot of surveyed land that is.  

Though it could be difficult to get financing on something with mobile homes and traditional homes on it.  Maybe possibly. Who knows. 

5 units is not the minimum to place a commercial loan on an asset.

It's simply the minimum number of units that requires a commercial loan.

You can still use a commercial/portfolio loan on single family, duplex, etc.

Hello @Jason Merchey , @Brian Garrett is correct. There is a common confusion/association with commercial loan products vs. commercial property types. There are many loan programs out there that underwrite 1-4 unit residential properties as if they were commercial properties. They're based on FICO/DSCR and have no problem with LLC vesting.

In terms of  your specific project, this is obviously a very unique mix.  The two mobile homes could be an issue.  Many (but perhaps not all) commercial lenders will not assign any value to the manufactured units. At the end of the day, their going to treat the property the way it is legally zoned so keep that in mind in this unique scenario. 

Even if larger mobile home park loans.  No value is assigned to park owned homes.  They value those types of properties based on the land + its ability to produce lot rent.  

If all those units are on one parcel, then it would be considered a commercial property (from a loan standpoint). If they are on more than one then you could get a standard residential type loan.

Thanks all. Alex (hey, I'm from Downey by the way!), actually I think refi-ing out is not plan A. Plan A is probably selling, and plan B is probably holding. 

I would assume that a buyer wouldn't care about the different types of structures, as long as it is a good and safe deal? Hoping for a 7.5 cap rate, as rates in this area range from 6 to 8.

If I kept it, it would cash flow well ($6,000 a month or so), but I would think that there are some issues with holding an asset 100% self-funded (well, an LLC is our vehicle). Most people pull cash out so they can use that on other projects. However, we are expecting to have about a 20% return annually (ROE and ROA), so my busines partner and I both like the sound of 10% return on assets we just put tenants in - as well as plumbing, electrical, HVAC, insulation, drywall, paint, windows, and floors. Ideally, we do it right and then we know it has the potential to grow in value 2-4% a year and flow beautifully in the meantime.