Financing a small commercial multi-family property in Oregon

12 Replies

My husband and I are in the process of selling our first (and currently only) rental, and we would like to use the money we have in equity to buy a 5-unit, multi-family property. I'm not sure how financing works for commercial properties and was hoping to get some insight. I know the required down payment will be slightly higher as well as the interest rate, but what kind of information are lenders looking for? From what I understand, financing will be less about my husband and I's income, and more about the property itself. Also, should we set up an LLC? And if we did, how would that work for financing?

Any help is appreciated!

@Rachel Payton - You are right commercial financing will require about 25% down for buy and holds and about 15% down for flips. You will need to set up an LLC as the loan must be in a business name. Your income is less of a factor as the property will be the biggest issue but you will need to personally guarantee the note. There are many types of commercial loan products so you will have a good deal of flexibility. I'd be happy to give you more information on the process and various aspects if you like. Feel free to connect.

@Rachel Payton welcome to BP. 

Since this is your first commercial property (anything over 4 units falls into that category), you will probably still have to be the center of the loan evaluation. 

The property will carry most of the weight but usually a 5 units property is not big enough to stand on its own. 

Find a few community banks and credit unions, setup appointments with the commercial lenders and introduce yourself. They will gladly review the terms they can offer for you. 

I've seen local banks offer as low as 60% LTV and as high as 80%LTV. IV also found a local regional that would do a cross collateral deal. The can and will get more creative than the big banks.

Make sure to educate yourself on commercial loans because they are a different animal than the conventional 1-4 units loans. 

your local community bank or credit union there in Albany or Corvallis is all you need. you could check Salem or Eugene as well.. stay local.. they know the market and invest in the markets. Ask a title company who is aggressive in the space or a good LOCAL commercial Broker they will know.

@Rachel Payton Commercial financing is very different from residential financing.  Commercial loans on 5+ units is typically 20% to 25% down for cash flowing properties.  20% down is for the strong properties and strong borrowers. You will need typically around 9 months of PI payments of reserves. 

Banks underwrite the debt service using the income and debts of the property and also your personal income and debts...called Global Debt Ratios. Whereas most national lenders underwrite the debt service on the property only.

Many lenders/banks lend in major metropolitan areas, or in their footprint, or they will have a minimum population requirement of 25,000, the exception is on Fannie Mae, Freddie Mac loans.  Many lenders/banks that are lending Fannie/Freddie products have a minimum loan amount of$1MM.  But don't worry there are lenders/banks that lend under $1MM.  If the loan amounts are under $250,000.00, you would need to go to a local bank or a private money lender. Remember local banks will also use your Global Debt Service to qualify for the loan. 

If you are buying a property out of state, most local banks will not lend to out of state borrowers, you would need to seek a lender that does. Do not let banks/lenders/commercial mortgage brokers pull your credit until you have decided to go with them.  Provide them a current credit report with credit scores. I would recommend going to a commercial mortgage broker to help find the product for you so that you do not waste time seeking financing when your contract is ticking down. Experienced mortgage brokers find the lender or bank that will lend on your deal, they sell your deal to the lender if your deal is on the fence, the broker explains the process and helps you navigate through the lending process. 

Lastly, most commercial loans close in 60 to 90 days.  If the contract is written for 30 days, than you will need to go with a bridge lender...hard money.  Bridge/Hard money lenders close in 30 days or less.

Hope this helps.

@Rachel Payton - You may want to consider a 1031 exchange to defer any potential capital gains from the sale of your current rental, if applicable. Commercial financing is very diverse and since the loan is usually held in-house (especially at local Banks & Credit Unions), it is up to each individual institution as to what terms they will offer. Unlike secondary market mortgages, you also may have a shorter amortization & a balloon/maturity. The property is very important but you and your Husband's personal credit (cash flow, liquidity, leverage) is still very important as you will likely be asked to personally guaranty the loan. Non-recourse lending would be a situation where the LLC is borrowing without any personal guaranty's from the owners, in which case the company would need to be established and need to stand its own.

There are a large variety of commercial loan products - Karen Schimpf is an expert at them.  She has helped lots of 1st timers cut thru all the noise and give you the best options.

Oh yea, if you have a seller who may have challenges getting financing on your residential rental, I can discuss options. Even cash out refi if you want to keep your current rental is an option with NIV (no income verification).

Commercial loans must be hard or are their some other issues?

Why are 4 plex more expense the. 5 units? Listing wise 4 plex are more expensive.

Is it because of tax issues? Loan issues?

Is it wise to get a 5 unit as new investor in Multi family?

@Taye N. I believe, many people use FHA residential financing to break into investing so they go for a 4 plex which means the buyer has to put less down. Conventional commercial financing is 20% to 25% down. Commercial Rehab can be 15% down but it is going hard money.

Taya,  Consider the interest rate, terms, assessments and expense of appraisals.  Generally your best deals are going to be in the residential arena 1-4 units per address. It is always easier to get a loan on a residential unit vs a commercial unit and much much faster close. I can get a residential deal done in 30 days vs a commercial deal can take a 90 days or more.  

Your best bet is to get a 4 plex with 14% cap rate.  It cash flows and you can sell it for 10X gross rent as things improve.

If a loan takes 90 days to close something is wrong. The lead time to gather the necessary docs to start the loan can be slow, but once you get to the point where the lender orders the 3rd party reports you should be looking at a 45 day(ish) close time. 

There is nothing wrong with getting a 5+ unit so long as you are ready and have laid a good foundation. By that, I mean you have a solid property management company lined up, have an accountant, and have a good understanding of the subject market(s) that you are shopping in.

Nothing wrong with 4-units, but there is something to be said about the economics of scale that buying more units gives you.

As to if commercial loans are hard; I don't think so, but they ARE more involved, but I don't think that makes them harder so long as you are fishing in the right pond with regards to your capabilities.

Thanks for all the info! We just put in an offer on the 5-plex today! So we'll see what happens. We've decided the best option is going to be starting an LLC, which we'll transfer the property to after closing (if we get it) I've spoken to 1 bank so far about financing, but plan on speaking to a couple more. It's going to be interesting learning the ins and outs of commercial real estate, but I'm excited for the challenge.

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