5+ Multifamily as Primary Residence?

15 Replies

I just spent about 10 minutes searching and didn't find an answer to this specific question so here it goes.

Does a bank look at a MF loan any differently if you make one of the units your primary residence?  

I'm looking in an "A" area. The building has a decent income and just cash flows, but falls short of what seems like banks general stress test figures of meeting a 1.25 DSCR at a 6% rate (even though they'll finance at 4.25%) because the owner's price is too high. However, when I consider living there as a primary residence, the economics actually make it a much more attractive investment for me than a SF or even a smaller apt building.

It's a neighborhood I love and I could actually see expanding my portion of living space over time. The building is a converted mansion in a neighborhood of mostly SF mansions, and so there is always going to be a discrepancy between what it should go for as a MF because it has a very high value as a SF. Even though it doesn't currently meet the bank's numbers, I could basically live there for free - and so it makes a very attractive primary residence option. It's also a signifiant value property ($500K+) and the idea of having most of that paid off by other tenants is appealing. And finally, given that I often have to take long term projects out of town, it would be much easier to sublet my apt than a SF. 

Will a bank consider the loan differently if it's a primary residence. If so, what kind of bank?

In order to own a commercial multi-family property, any property with at least 5 units will need to be owned by a company (ex. LLC), not an individual. The magic numbers are 1-4 units is residential, but as soon as you hit 5 units, the game changes.

First off, I would ask the owner why the price is as high as it is. What are comparable units in the area priced at? What is the owner's motivation for selling? Does he need the cash from the sale ASAP or is he a buy and hold owner who is looking to get as much profit as he can out of the property?

If you are absolutely set on getting this property, here's how you can get it. Negotiate the price lower. Tell the owner you'll pay 70-80% because a bank won't possibly accept the price he is asking. If he refuses, you still have at least two more options to consider. One would be owner-financing. You wouldn't even need to negotiate the price any lower if the monthly numbers work. Why? Because you won't need to put any money down, the property will cash flow, and the owner will be receiving his monthly check (acting as if he were the bank) for the length of the term you two agree on (15-25 years). As a last resort, you could seek a combination of hard money and/or private lenders in your network/area. "But I don't have a network." Yes you do. You have doctors, a dentist, real estate agents, lawyers and other people who you know. Go present the deal to them. Act as if you were meeting with a bank. Be as professional as possible- this is purely a business transaction/investment. 

Now that I've told you how, you have no more excuses. Go get that property. :)

@Jonathan Fowler

Thanks for the input. I already have an LLC for real estate, so that company would be making the purchase. I also know that I have to buy the property through a commercial lender if going to a bank. The question I have is if there any situations where a commercial lender considers the loan any differently if one of the members of the LLC utilizes the property as a primary residence.

Originally posted by @Christopher Za :

@Jonathan Fowler

Thanks for the input. I already have an LLC for real estate, so that company would be making the purchase. I also know that I have to buy the property through a commercial lender if going to a bank. The question I have is if there any situations where a commercial lender considers the loan any differently if one of the members of the LLC utilizes the property as a primary residence.

 Not as far as I'm aware of. They are looking at the property and evaluating the risk involved with selling the property if you stopped making payments. Obviously, you won't do that, but the risk lies with the bank because, until the loan is paid off, the bank still owns the property and yes, it is still commercial. 

You say that a certain bank won't be interested in this specific property because of the seller's asking price. Go call 20, 30, 40 banks. Seriously, open your phonebook and call every bank and credit union in your state. Also, use BiggerPockets to search for commercial lenders. Don't stop calling until you get a "yes." It only takes one to make this happen. 

Best of luck.

go with a FHA loan they do 96.5 percent financing with a 3.5 percent down payment and the rates are at 20 yr lows like 3.25 percent also with multifamily I was actually going to do the same thing and the really only thing they take into consideration is will it be owner occupied so like you said it would I don't see any problem with it but with that being said it must be 4 units or less can't be more than 4 and the amount cap that they will lend differes but is still a great amount

You do not list the price of the house.  You do not list the current rents of the 5 apartments.  You say nothing aout the renovation costs or the listed information on the house from Zillow.  

How can anyone even know where to begin on a question that is so lacking in information

@Bob Bowling

Yes, it's a great neighborhood. How do you know the area? I'm in contract on another building (in the area known as Licking B (versus A, where this one is) owned by the same guy. Apparently he's had this one on the market (not mls until this year) for about 15 years. The properties that sell in that area are going to people who basically overspend massively relative to the market (I know first hand of a couple of properties that have had 5M put into them but will never sell for more than half of that right now), particularly if they are looking at a property like this one which would require a great deal of money to restore to it's historical grandeur (what people are doing there). However, as a primary residence for me it would be ideal (my wife and I are coming back to the are from New York, and this reminds of the nicest blocks in Brooklyn, the West Village, UWS etc.).  I could make improvements over time, and maybe some day when I either have more $$ or that golden unicorn buyer comes along, I could even turn it back to single family (though I honestly could never see myself needing more than 3000 ft2). But it's a MF commercial property right now and that's the only way a bank is going to look at it, and on that level it's probably worth about $250K less than he's asking. Obviously, it's going to be a long wait, but I had thought that I might be able to approach him with some alternative financing ideas after some time (he doesn't want to hold paper...yet). The irony is that he's much more realistic about his other 9 unit which has an extremely similar profile just two blocks away. So he's obviously waiting around for that golden unicorn too!

It looks like you've traded in for the part of the world we hope to be in full time someday. Mahalo!

Originally posted by @Barbara G. :

You do not list the price of the house.  You do not list the current rents of the 5 apartments.  You say nothing aout the renovation costs or the listed information on the house from Zillow.  

How can anyone even know where to begin on a question that is so lacking in information

 I'm sorry Barbara. I didn't believe that any of that info was relevant to the question I was asking, which is simply: 

Will a commercial bank regard a properly differently if the buyer is using the MF property as a primary residence.  It's looking like the answer is no...

* The section heading of this subforum stipulates that this is for commercial "anything 5+ units and over." I understand there may have been confusion when I assumed that others were operating on that understanding. 

@Christopher Za ,

I'd be curious as to what your RE attorney might say in answer to your question.

The way I tend to think of it is to make the acquisition first. I don't think the lender really cares who the tenants are and whether you are or become a tenant of your LLC's property, though there may be some legal implications there. Again, review the scenario with your RE attorney, your tax attorney and tax accountant as well as any other relevant professionals. It's not as simple a question as it may appear.

@ChistopherZa

There is some good feedback and some bad in this string. As mentioned above anything with 5+ units is considered commercial. You're correct, you CANNOT get an FHA loan. They are only good for residential properties with 1 to 4 units. BTW, you DO NOT have to be an LLC or other commercial entity to purchase a commercial property. It just makes financial sense to do so.

If you know that you have to get a commercial loan and put 20-30% down, depending on the lender, you and the property, then why is their a big concern of you living in the property or not? 

If the seller is asking too much for the property then one of the tools you can do to determine if the value fits your investment criteria is a reverse cash flow analysis, otherwise known as a discounted cash flow analysis, to see if the purchase price makes sense, especially if your using a cap rate as your benchmark. The analysis is beyond the scope of this post, but if you email or contact me directly I can do one for you and let you know if it works.

The other widely used method to determine if your paying too much or not is to use the comparable approach and find the average price per unit value for that market and submarket. You will need a local broker or appraiser to assist in finding that data, unless you have access to CoStar, Axiometrics or REIS Reports. If you need help locating someone in your market I can help with that also.

Originally posted by @Christopher Za :

@Bob Bowling

Yes, it's a great neighborhood. How do you know the area? I'm in contract on another building (in the area known as Licking B (versus A, where this one is) owned by the same guy. Apparently he's had this one on the market (not mls until this year) for about 15 years. The properties that sell in that area are going to people who basically overspend massively relative to the market (I know first hand of a couple of properties that have had 5M put into them but will never sell for more than half of that right now), particularly if they are looking at a property like this one which would require a great deal of money to restore to it's historical grandeur (what people are doing there). However, as a primary residence for me it would be ideal (my wife and I are coming back to the are from New York, and this reminds of the nicest blocks in Brooklyn, the West Village, UWS etc.).  I could make improvements over time, and maybe some day when I either have more $$ or that golden unicorn buyer comes along, I could even turn it back to single family (though I honestly could never see myself needing more than 3000 ft2). But it's a MF commercial property right now and that's the only way a bank is going to look at it, and on that level it's probably worth about $250K less than he's asking. Obviously, it's going to be a long wait, but I had thought that I might be able to approach him with some alternative financing ideas after some time (he doesn't want to hold paper...yet). The irony is that he's much more realistic about his other 9 unit which has an extremely similar profile just two blocks away. So he's obviously waiting around for that golden unicorn too!

It looks like you've traded in for the part of the world we hope to be in full time someday. Mahalo!

 Aloha Christopher, before I escaped I attented high school at Newport HS, Dixie Heights HS and Boone County HS.  Also went to NKSC, NKU and Chase.  I sold real estate in the 70's and worked at the IRS center there in Covington.

I was back two years ago visiting a buddy that has a nice condo in the old Booth Hospital.  The mansion across the street has been converted into multiple rentals.  I thought you might be talking about that. 

What is ever going to happen to the old Project property in Newport on the Ohio & Licking river?  What a fantastic piece of property!

Good luck with your project.  I had friends that restored $17,000 Covington and Latonia houses that they'll never get their money back but they'll have a lifetime in a beautiful house.

Originally posted by @Chris Seveney :

I am wondering where your getting a commercial mortgage for 4.5% ? I haven't seen anything less than 6% for a 20 year note

I just closed a cash out refi of $1mm+ 3 months ago @4.25% for 20 year am, 10 year fixed, with 10 year option with capped increase in rate. They are out there, just need to work with the regional lenders versus national in most cases.

As to the OPs question, I was successful in borrowing on a legal 5 unit property that the bank treated as a 4 unit for lending owner occupied, but it took me nearly 6 months to close the loan after jumping through hoops. Got a 30 year fixed rate @ 3 7/8% as well, which is great for me, but I cannot stress how difficult a transaction this was to pull off. Since 5 units technically puts you into commercial status, in your case with 8 I don't see it happening. I had the benefit of a stairwell between 2 units so I was able to have the bank treat it as a duplex unit versus the legal 5 units with the town.