24 Unit. Residential Mortgages or Commercial Loan?

26 Replies

Let's say there was a 24 unit apartment complex that you wanted to buy. The complex is actually composed of 6-4 plex buildings all on separate parcels. Would it be better to finance through residential mortgages or through a commercial loan? 

Obviously you would probably get better terms financing it with residential, but I am curious if the rules of forced appreciation still come into play when financing through this method. 

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"but I am curious if the rules of forced appreciation still come into play" not sure what that means. Anyway, how you finance these units will really depend on what your plans are for the units.

Since you have separate buildings on separate lots you may want to consider financing each with a conventional loan. This would give you the flexibility to hold onto some and or sell less than all at opportune times to sell. 

If your goal is to operate and manage all the units as one large complex and package them for sale as one complex some time later then you might want to consider obtaining a commercial loan at today's low interest rates. A buyer can then assume the loan later after rates have risen and you'll make your property more attractive Vs competing properties in a higher interest rate environment.

Create a short term and long term business plan for these assets and this should help guide your decision on which way to lean in financing the acquisition. You might also want to price the cost of each option. You'll need to pay for points, and appraisal cost for multiple properties Vs a commercial appraisal.

i believe you will need to use a commercial loan. FHA/traditional loans are limited to no more than 4 individual loans per person (you can't buy in the LLC name) and no more than four units (doors) per loan. Or so I think........

Originally posted by @Mike R. :

i believe you will need to use a commercial loan. FHA/traditional loans are limited to no more than 4 individual loans per person (you can't buy in the LLC name) and no more than four units (doors) per loan. Or so I think........

 Nope, can have up to 10 loans.  Not too long ago I made a purchase of 5 duplexes on a single street that was a package sale.  Bank wrote it as 5 x residential loans (on top of my primary residence) - I recently consolidated/refinanced them to a single commercial loan.

Originally posted by @Matthew Saskin :
Originally posted by @Mike R.:

i believe you will need to use a commercial loan. FHA/traditional loans are limited to no more than 4 individual loans per person (you can't buy in the LLC name) and no more than four units (doors) per loan. Or so I think........

 Nope, can have up to 10 loans.  Not too long ago I made a purchase of 5 duplexes on a single street that was a package sale.  Bank wrote it as 5 x residential loans (on top of my primary residence) - I recently consolidated/refinanced them to a single commercial loan.

 Thanks for the info. This is actually what I want to do. I own a 4 unit that I bought with conventional financing. I have a second 4 unit under contract that is directly adjacent to the first and I am buying it with owner financing. I would like to refinance them both under a commercial loan in the future and was wondering if that was the best course of action?

It seems like you went that route with your duplexes. If you don't mind me asking, why?

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Originally posted by @Anthony Gayden :
Originally posted by @Matthew Saskin:
Originally posted by @Mike R.:

i believe you will need to use a commercial loan. FHA/traditional loans are limited to no more than 4 individual loans per person (you can't buy in the LLC name) and no more than four units (doors) per loan. Or so I think........

 Nope, can have up to 10 loans.  Not too long ago I made a purchase of 5 duplexes on a single street that was a package sale.  Bank wrote it as 5 x residential loans (on top of my primary residence) - I recently consolidated/refinanced them to a single commercial loan.

 Thanks for the info. This is actually what I want to do. I own a 4 unit that I bought with conventional financing. I have a second 4 unit under contract that is directly adjacent to the first and I am buying it with owner financing. I would like to refinance them both under a commercial loan in the future and was wondering if that was the best course of action?

It seems like you went that route with your duplexes. If you don't mind me asking, why?

 Handful of reasons which are all related.  First, we're in the process of formalizing our business (more-so than it has been) and as part of that, we've gone through entity setup in the states where we operate (North Carolina and New York) and as part of that, had a desire to move ownership of our properties over to the commercial entities, the right way (eg; a commercial loan, not just transferring ownership and crossing our fingers).  As a byproduct of that, we'll benefit from moving them to commercial loans and no longer having the various loans on our personal credit/credit report - a nice side effect as we're in the midst of moving our primary residence as well as it's a lot easier to deal with now that we have 6 mortgages gone from our credit report and are down to just our primary residence.  Third, although not really important, we're able in all cases to lower our interest rates by moving to commercial paper (from 4.25% to 4% for one group of properties, from 5.375% to 4.375% for another group).  Truthfully, we'd do this even if we were paying a slightly higher rate, but the decrease made it all the more palatable.

curious how long is your fixed rate lock on the commercial loans?

Matthew, My Wife and I bought a duplex over a year ago in North Carolina and we're now looking to make our next move. We currently live in one side of the duplex. The duplex was a foreclosure and we put 15% down because we decided to live in it. Our Morgtage Broker is telling us that we wouldn't be able to move into another duplex because he couldn't "justify it to Fannie Mae". He says that we need to make it look like we're "moving up" on our next primary residence. Is that accurate information? We have an LLC for our business and would rather purchase properties with our business but Ive also been "told" that we would use our personal credit anyway. Is that true? I've also heard from a Morgtage Broker that it's 25% down on multi-family investment property. Is that correct? How would you recommend we buy another Duplex? All input would be appreciated! Thanks
Originally posted by @Matthew Saskin :
Originally posted by @Anthony Gayden:
Originally posted by @Matthew Saskin:
Originally posted by @Mike R.:

i believe you will need to use a commercial loan. FHA/traditional loans are limited to no more than 4 individual loans per person (you can't buy in the LLC name) and no more than four units (doors) per loan. Or so I think........

 Nope, can have up to 10 loans.  Not too long ago I made a purchase of 5 duplexes on a single street that was a package sale.  Bank wrote it as 5 x residential loans (on top of my primary residence) - I recently consolidated/refinanced them to a single commercial loan.

 Thanks for the info. This is actually what I want to do. I own a 4 unit that I bought with conventional financing. I have a second 4 unit under contract that is directly adjacent to the first and I am buying it with owner financing. I would like to refinance them both under a commercial loan in the future and was wondering if that was the best course of action?

It seems like you went that route with your duplexes. If you don't mind me asking, why?

 Handful of reasons which are all related.  First, we're in the process of formalizing our business (more-so than it has been) and as part of that, we've gone through entity setup in the states where we operate (North Carolina and New York) and as part of that, had a desire to move ownership of our properties over to the commercial entities, the right way (eg; a commercial loan, not just transferring ownership and crossing our fingers).  As a byproduct of that, we'll benefit from moving them to commercial loans and no longer having the various loans on our personal credit/credit report - a nice side effect as we're in the midst of moving our primary residence as well as it's a lot easier to deal with now that we have 6 mortgages gone from our credit report and are down to just our primary residence.  Third, although not really important, we're able in all cases to lower our interest rates by moving to commercial paper (from 4.25% to 4% for one group of properties, from 5.375% to 4.375% for another group).  Truthfully, we'd do this even if we were paying a slightly higher rate, but the decrease made it all the more palatable.

 would you mind sharing who you used for your blanket loan on these properties i.e. B2k etc and how was your experience?

Anything above 4 units is considered a commercial loan
Originally posted by @Leo Falbo :

 would you mind sharing who you used for your blanket loan on these properties i.e. B2k etc and how was your experience?

 A group of them were handled by Citizens Community Bank, based out of virginia.  Another group was handled by BCB Community Bank in NY/NJ.  Both of them were run through a mortgage broker I utilize down here in Raleigh.

Originally posted by @Chris Seveney :
Anything above 4 units is considered a commercial loan

 Not exactly. Read the scenario in my first post and you will understand.

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Matthew, thanks. It seems BCB has a strong presence in NJ do you know if they fund loans in NY? Or can you put me in contact with your mortgage broker?

Thanks

Originally posted by @Leo Falbo :

Matthew, thanks. It seems BCB has a strong presence in NJ do you know if they fund loans in NY? Or can you put me in contact with your mortgage broker?

Thanks

 They do fund loans in NY - the property I'm working with them on right now is in Brooklyn.  You can likely just get in touch w/ BCB directly.  Certainly don't need to run through a north carolina mortgage broker for it.

Originally posted by @Mike R. :

curious how long is your fixed rate lock on the commercial loans?

 The two most recent commercial loans I did are:

750k @ 80% LTV, 20 year amortization/6 year term, 4.25% fixed rate

1.4m @ 70% LTV, 30 year term fully amortized, 4.375% for first 6 years (maybe 7, can't recall), annual adjustments thereafter

Originally posted by @Chris Nelson :
Matthew, My Wife and I bought a duplex over a year ago in North Carolina and we're now looking to make our next move. We currently live in one side of the duplex. The duplex was a foreclosure and we put 15% down because we decided to live in it. Our Morgtage Broker is telling us that we wouldn't be able to move into another duplex because he couldn't "justify it to Fannie Mae". He says that we need to make it look like we're "moving up" on our next primary residence. Is that accurate information? We have an LLC for our business and would rather purchase properties with our business but Ive also been "told" that we would use our personal credit anyway. Is that true? I've also heard from a Morgtage Broker that it's 25% down on multi-family investment property. Is that correct? How would you recommend we buy another Duplex? All input would be appreciated! Thanks

 First recommendation - find a new mortgage broker.  Anyone that tells me they can't justify something to their underwriters is someone that's not actively working on my behalf, in my opinion.  PM me and I can put you in touch with some brokers I've worked with in the past.

As for purchase under residental vs. commercial mortgage, that's a whole different discussion. For only a single property (single duplex, etc.) I can't give any good guidance as I've never done any commercial deals that small - all of mine have been for blanket loans across multiple properties (eg; 10+ units) or single high value properties (eg; 4 unit/1M+ properties in new york). You are correct that in most cases, any commercial loan to a smaller/not established LLC is going to be personally guaranteed by you - that said, these still don't appear as residential mortgages on your credit report, so although you're guaranteeing the loan it won't appear as a mortgage (or any debt for that matter) on your credit report. Also correct on the down payment - my experience with using residential loans for investment properties has always required 25% (or more) down - on the commercial side I've usually been able to do 80% LTV depending on the market.

The "best" finance option is base on the details pf the individual mortgage options and your own financial situation/goals. Essentially it depends from my understanding.

with interest rates where they are (low) and where they are headed(higher). Why wouldn't an investor lock in current rates for as long as possible.  Rate lock for six years and then annual resets thereafter sounds like a lot of risk

Originally posted by @Mike R. :

with interest rates where they are (low) and where they are headed(higher). Why wouldn't an investor lock in current rates for as long as possible.  Rate lock for six years and then annual resets thereafter sounds like a lot of risk

 I agree in one aspect. However if it is a value add investment, as a 24 unit, if I use commercial financing, I may be able to refinance after the value add and draw money out so that I can do more deals. I would be able to do the same thing under residential, however the value of the properties has nothing to do with the cash flow, and everything to do with how much comparables are selling for in the area. 

Also there is the whole thing like another person said that you will have to pay for 6 different closing costs and get 6 different loans. That may end up being more out of pocket at the beginning of the deal. Oh and the fact that you can't get the residential loans as an LLC. If you are using partners, it may be harder to arrange.

 
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Originally posted by @Mike R. :

with interest rates where they are (low) and where they are headed(higher). Why wouldn't an investor lock in current rates for as long as possible.  Rate lock for six years and then annual resets thereafter sounds like a lot of risk

 Put bluntly, don't assume that you, or I, or anyone, can accurately predict where the market is going and in turn, where interest rates are heading.  6 years is a long way out, with a whole host of impacting events in the middle of it (Euro-zone issues, an election cycle and new president, potentially a new party being elected, etc.).  I'm of the believe that you take the financing that's available and fits the bill for the opportunity you have in question - whether that means accepting variable rate risk for the right deal (or for a deal that has future potential for easy refi's to more stable funding, or one that you plan to only be in for less than the fixed period) or holding until you can align a deal with the availability of fixed rate funding.

Originally posted by @Matthew Saskin :
Originally posted by @Mike R.:

with interest rates where they are (low) and where they are headed(higher). Why wouldn't an investor lock in current rates for as long as possible.  Rate lock for six years and then annual resets thereafter sounds like a lot of risk

 Put bluntly, don't assume that you, or I, or anyone, can accurately predict where the market is going and in turn, where interest rates are heading.  6 years is a long way out, with a whole host of impacting events in the middle of it (Euro-zone issues, an election cycle and new president, potentially a new party being elected, etc.).  I'm of the believe that you take the financing that's available and fits the bill for the opportunity you have in question - whether that means accepting variable rate risk for the right deal (or for a deal that has future potential for easy refi's to more stable funding, or one that you plan to only be in for less than the fixed period) or holding until you can align a deal with the availability of fixed rate funding.

 Mathew well said.. Also thanks again for info on BNC Bank, i did reach out to them directly and was contacted immediately by a NY commercial loan rep who happens to live in LI where the bulk of my portfolio is, will see how it goes.

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Originally posted by @Leo Falbo :
Originally posted by @Matthew Saskin:
Originally posted by @Mike R.:

with interest rates where they are (low) and where they are headed(higher). Why wouldn't an investor lock in current rates for as long as possible.  Rate lock for six years and then annual resets thereafter sounds like a lot of risk

 Put bluntly, don't assume that you, or I, or anyone, can accurately predict where the market is going and in turn, where interest rates are heading.  6 years is a long way out, with a whole host of impacting events in the middle of it (Euro-zone issues, an election cycle and new president, potentially a new party being elected, etc.).  I'm of the believe that you take the financing that's available and fits the bill for the opportunity you have in question - whether that means accepting variable rate risk for the right deal (or for a deal that has future potential for easy refi's to more stable funding, or one that you plan to only be in for less than the fixed period) or holding until you can align a deal with the availability of fixed rate funding.

 Mathew well said.. Also thanks again for info on BNC Bank, i did reach out to them directly and was contacted immediately by a NY commercial loan rep who happens to live in LI where the bulk of my portfolio is, will see how it goes.

 Good stuff.  Len Bosso by chance?  That's who we're working with.

I find commercial financing to be much easier, I'd just get a commercial loan on all the properties under one company like 24 Unit Main St LLC. The other option is a kaleidoscope of residential mortgages which just sounds awful, residential loans are a PITA to apply for.

If they were in poor shape and this was going to be an extensive rehab and value added deal my bank would structure it as an interest only construction loan for the first 12-18 months. Interest only is nice it keeps the cash outlays low until the rents come in, a million bucks is only like $5k a month.

Originally posted by @Mike R. :

with interest rates where they are (low) and where they are headed(higher). Why wouldn't an investor lock in current rates for as long as possible.  Rate lock for six years and then annual resets thereafter sounds like a lot of risk

 No one can predict the future but I'm terrible concerned about this as well. I'm paying my mortgages down in the event that interest rates are significantly higher in 5-7 years. 

No way around it though, fixed rate commercial loans are hard to come by.

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