5 unit Commercial Loan

16 Replies

Hi All

I am currently looking into a 5 unit residential property (no commerical space here) in Philadelphia. I am very new to the game so any tips here would be great. Just looked at the property this weekend with my partner in crime and we both agreed this property is worth diving into.

However, as you may suspect with my youth (23 years old) I do not have a great grasp on the commerical loan realm. Needless to say, I don't have much expercience in real estate, besides watching my dad build a mini empire of houses. To give you a rough vision of this property, it is sitting in a C+ to B- area (subject to one's opinion obviously) but is by no means a scary neighborhood. The property has been completely renovated as of August 2013, new water heaters, new windows, new kitchens, refurbished common stairwell with nice wood finish and a nice stone front look from the exterior. Currently, there is one vacant 2 bedroom unit, one occupied 2 bedroom unit, two occupied 1 bedrooms, and 1 occupied stuido (top floor but nice space, i would estimate 600-700 sq ft). Fully rented out this property has a potential income of $3,400/ month.

Enough of the details i dont want you guys stealing my property haha, my real question is what do you think my best option for financing would be? Will a commerical loan be too difficult to attain, given my lack of a track record/ excperience and the fact i will only be able to put down 30%? My plan is to explore seller financing possibilites while i hunt down a commerical loan that will satisfy my needs. You may be thinking at this point, why doesnt this kid ask his pops? I have and I have him interested but he really wants to see me get this done on my lonesome, not cool right? But i respect that. Also, if you are wondering, my "partner" is my a good friend who is my age and has been persuaded by me to pursue this endeavor, he's got some cash.

At listing price we are looking at potentially 82K down (at 30%), which is definitely a bit of strech for our personal funds but we have been looking at properties for a while now and this is definitely the one to make a move on.

Let me know what you guys think. Appreciate any insight or advice on the matter. I only ask that you dont reply saying this is out of your league because I know i can make this work. I have a lot of resources at my disposal that i didnt discuss here (mainly family).

Thanks for reading.


First, I am sure you will get lots of good advice here. Since you are asking about financing I am assuming you ran the numbers and have a good idea on expenses and cash flow. That is how your commercial lender is going to evaluate the financing. I would speak with a few local banks who may be more likely to consider the loan. A mortgage broker will charge a fee of 1-1.5% avoid that if you can although you can also talk to them about possibilities which is free. If you have been looking at commercial properties for a while you should also be talking with lenders so that you can present any offer with a pre-approval. (this might be tougher with not much credit history). A 5 family will require commercial lending whereas a 4 family or less would not and would be based on your personal credit.

I am hoping some others will chime in. We did a recent similar purchase but have a long credit history which factored in. They wanted 25% down standard and some expense reserves. I have seen some posters out there who started at your age and could have some insight as to where best to go in your situation.

Thanks Colleen,

Interested to hear about your recent investment, how is it performing?

I was looking into a 223(F) loan, if I understand this loan correctly I could use it to finance this 5 unit with 15% down. If anyone would like to elaborate on the pros and cons of this type of loan that would be great. I dont necessarily need to go this route, I can more than likely come up with close to 80K to fund this property but it's nice to know all your options.

Very interested to learn more on the subject even if this property doesnt end up working out for me.

I believe 223(f) loans are only available for larger loans, above $500k or $1mm. With a loan amount of $186,000, tough to find a bank loan. Will the seller provide copies of their last 2 yrs schedule E from their tax returns?

@William Beck

I bought a 5 unit a few years back and worked successfully with a small local bank for the financing. They did look at the rent rolls but also my personal credit even though it was a commercial loan.

I think with 30% down, strong credit, and cash reserves you should find a local bank willing to entertain it.

Keep in mind the term will probably be 10 or 20 years, so factor that in. Also insurance and maintenance in general is higher. If there's damage to a hallway or the laundry room, for example, it's hard to pinpoint it to any specific tenant.

Good luck and let us know!


Hi All

Thanks for responding. Recently inquired for all financials including rent roll and tax returns, as mentioned above. Hoping to receive this information by 9/26 so i can confirm the numbers i have been playing around with.

On a separate note, what is the best method for evaluating vacancy rates in an area? I have heard that exploring the area in person is one of the most effective strategies, physically observing the area and looking out for rental signs and what not. Are there any other methods of evaluating vacancy rates?

This 5 unit has recently rented out the last vacant unit, meaning it is 100% occupied. However, not sure if this should be a settling feeling until I can confirm rents/ lease agreements with the seller.

I was also wondering what house material is seen as the highest overall quality (i.e. brick, masonery, stucco, vinyl siding..)? More of a curiosity question but i am sure this should play into an evaluation.

Thanks again for any advice.

Surveying the market for available rents is good, but you really want to evaluate how the particular building is for vacancy rate. How often has it been vacant and for how long. One way would be to look at the rent role and the tax returns to see what annual income is, then compare to current income at 100% rented. Not sure I am being clear?

Brick/stucco is always the best, lasts forever. Then vinyl, painted wood can have a big maintenance cost.

Thanks Jon

Still waiting on the financials, so once i receive i will be sure to cross compare against the current situation and potential income.

More to come...

Thanks for your quick responses.

Hi Bill,

First, kudos for embarking into commercial real estate, I think it's the best way to create long term wealth. And you're getting started early, good for you!

You had some questions about financing.

Seller financing is great if you can get it. You should always ask the seller. Maybe offer a little bit more (even above asking) to sweeten the deal.

The best source of financing is still a traditional commercial lone. As Colleen pointed out, a 5+ unit will be considered a commercial loan. But even for my 12-unit we bought two years ago, your personal financials unfortunately still play a major factor in underwriting.

But you already have a lot of the minimum requirements for qualifying for a loan. You have cash to put 30% down - most banks look for 25% or 30%. Check.

The building is 100% occupied. Very good. The bank will want to see the financials obviously. But an occupied building is easier to get financing for than a vacant one. Just make sure you try to verify the actual rents collected. The best way is to get actual bank statements from the seller. You may not get all of the documents you request, but you must INSIST on verifying the rents actually collected.

The one thing you may be weak on is track record and personal financials. OK, not ideal, but you can overcome this. Here are a few tips:

Tip #1: Create a one pager about yourself. Write down anything you've done and succeeded at. Show the lender that you have a track record of success and are ambitious. Also mention your partners. If your Dad is in real estate, list him as a partner and mentor, and describe his experience. List your CPA, especially if he has real estate experience. Do you have a real estate attorney? If not, find one, then list his bio also. All of this adds to your credibility.

Tip # 2: Find a strong financial partner. For smaller properties, the bank will want personal guarantees, good credit and minimum liquidity. (Interestingly, the larger the deals get, with loans > $1M, the chance of getting non-recourse loans, i.e those where your personal financials play less or no role at all, become greater). Since you do have resources (your family & friends), find someone who would be willing to co-sign the loan. In return, you will give them a % of equity in the building.

Tip # 3: Talk to local banks. Avoid the national or regional ones. It's much more about relationship with the small local banks. Schedule appointments with several local lenders. Show up with your one pager. Put together a short financial package of the deal you're looking at. Even if you don't have the property under contract, make up a deal package anyway. This will give you a much better chance to make a good first impression.

I know you can do it!



I hope all is going well with your investment so far? The 223(F) loan is a great loan for multifamily but only good for long term investments (prepay to big for early flips, 1-4 years) and you can't beat the low rates. This program would help your cash flow because of the 35 yr. amortization. The delinquency rate in that area (C) is much higher for a two bedroom. To keep this short because I can read a book about philly commercial investing. Get yourself a note book just for each property full of your guidelines to follow and check offs.

Good luck

Lots of good advice here, thanks all!

Shane, my partner and I definitely thought about your strategy but how would we go about that if its zoned as a 5 unit? Not sure we would be able to start blowing up walls until we own it haha.

Mike, appreciate the information, the one pager is a solid idea and I definitely want to incorprate this into my larget b-plan template. I am still waiitng on financials from the owner, apparently his accountant combines his yearly property income into one report, which definitely isnt helping me.

I have confirmed the seller is willing to offer a 2 year seller finance term, however, to be honest I'm not sure how i could use it to my benefit. I am still in the process of solidifying down payment funds for this property, so maybe I can negotiate the seller financing to help in that regard? Say i need 20K to close the deal and I offer a % of monthly cashflow (maybe I offer him % of cashflow for 3-5 years to sweeten the deal?) as well as a percent return on the principal once the 2 year term is up. Thoughts? Maybe someone can expand on what my pitch should be?

Appreicate the tips, FYI, we are working with Monument Bank. Not sure if anyone is familiar with this bank. The guy I am speaking with there is a family friend and seems to be willing to work with my situation, understanding my lack of history and experience in the game. At the very least i feel i can learn a great deal from this whole experience, anxious to see how this all moves forward.


The seller could carry a second for the 82k down payment money and you could get into the property with no money down. Use any extra funds for repairs and then refi after the two years.

Being in the commercial lending arena for many years, I have not seen a financial institution do a loan where the seller second was used to satisfy the entire down payment required. I am referring to the last few years after the real estate bubble burst. If anyone here knows of one I'd love to hear about it, please. The most typical scenario for a seller second is a 70/20/10 with your contribution being 20% and the seller carrying a 10%.

William, you can either secure financing now and if you and the property qualify for a 70/20/10 this may be an option. Or, if the seller is willing to do a land contract (where you get title to the property) for 2 years, ask what's the least he'd take for a down payment. Work out terms which would be favorable to both of you. Be sure there will be no PPP, and after one year you can start the process of refinancing to pay the seller off. In commercial lending one year is the seasoning minimum to be able to use a new appraised value. So, if the appraisal comes in higher than the purchase price you're in luck.

Last thing to address. I know you've been recommended to avoid brokers. The idea is you save a point or two that a broker may charge you. The truth is sometimes it's better to use a good broker. Why?

1. An experienced mortgage broker has strong affiliations with viable lending sources. Their years of experience account for knowledge of where they can find the best financing fit for you. Even if you start doing internet research you won't be able to reach these sources easily, not to mention the time you'd have to spend contacting your researched links. Beside that you're pretty much limited to the local banks which are limited in programs. In the end, would you pay an extra point or two to get better terms than what you're offered locally? I don't know, that is your call to make.

2. Secondly, there are lenders who compensate the broker, thus you wouldn't have to incur the extra fee. But you won't know unless you experience this. In the end, you'd have to realize that a valuable service has to be compensated, whether by the borrower or by the lender.

I wish you luck!

Hey William I'm in the Philadelphia area as well and I'm 23. We should connect together. Would like to hear more about your story

I moved on from it actually. Thanks for asking. However, since then I have acquired two properties in South Orange, NJ. My duplex has been performing nicely over the past couple years and the single I just recently picked up and am in the process of renovating before renting out. 

I'll probably start another thread on the single family I mentioned above, would love to hear BP's recommendation on certain things as I move through the project. This will be my first time running a significant reno. So far so good though!