Financing for MF 5+ units vs 1-4 SFH

16 Replies

Hello BP! As a quick background, I am from Canada and currently in the process of developing and renovating our recently purchased primary residence, which we will then refinance and should have a decent chunk of money to invest. I'm interested in investing in the US market where our money can go further, as the local economy has been floundering, but the average SFH price is still about $500k. I am still researching different US markets, but I'm leaning toward Ohio, though considering Georgia, Indiana, and other states. My original plan was also to focus on 2-4 unit properties, as I've heard it's easier to finance those.

Then I realized I'm probably not seeing the bigger picture because I locked onto "easier to finance" 2-4 residential units. Just because it may be easier now doesn't actually mean better long-term, and I want to scale up fairly quickly. 

I still have a lot to learn, but what are the biggest pros and cons for investing in SFH 2-4 units and MF 5+ units?

How does the financing differ on each? 

Are there any additional tax or other considerations with one or the other being that I'm not American and don't reside in the US? 

Can you 1031 either type of property? (And as a Canadian does that apply to me?) 

Thank you! 

Can’t speak to Canadian vs American for tax consideration.

However, if I could buy a 4 unit or 5 unit at a similar cap rate, price per unit, I’d take the 4 unit 100% of the time. Not only is it easier to finance, but it is easier to sell.
Good luck.

Hi Brianne,

Welcome to BP. I’m am working on my first commercial purchase too. So I’ve learned a lot in the past month. The biggest difference. Is that >4 units requires commercial lending if done in the traditional sense (i.e. from a bank).

The biggest difference is that in commercial loans, from what I’ve seen, you cannot get a 15 or 30 yr fixed mortgage. Typically you are looking at one of two options. 1) 7-yr ARM or 2) 5-15 Balloon Which is a 5 year term amortized like a 15 year term with a either a balloon payment or refinance at the end of those 5 years.

So basically the monthly payments are greater and the terms are not as good on commercial properties. The APR might be slightly higher but I believe it’s currently within .5 point depending on the lender and borrower. As far as taxes go, unless there are specific state taxes, I’m not aware of any differences from going to 4->5+ units.

Unfortunately I’m not sure about 1031 exchanges. I’ve never done one.

Hopefully this gets you started. Good luck!

It's harder to finance deals under $1M loan price and much easier as they get bigger. A 5 unit may be harder than a 4 unit to finance, but a 100 unit will be much easier than both. 

@Todd Dexheimer I was just at the Old Capitol Multifamily conference in Dallas and all of the lenders echoed that. The terms even seemed to be better over $1mm.

Not sure if 1031 would be any different for a foreign national but my understanding is that you can 1031 any investment property as long as you exchange for something of like kind.  Talk to a 1031 expert for clarification.

As a foreign national you will have less flexibility for financing.  Many lenders will lend to you but they often will require lower LTVs so you'll need more cash for the deal.  But many lenders will not lend to foreign nationals at all.

It will also be helpful if you have a US corporation, ITIN, and file taxes in the US.  

There are many loan options for 5+ units.  You can even possibly get a fully fixed 25yr rate.  There are many with 30 yr AM and fixed periods of 3, 5, 7, 8, 10,....and even 25yrs.

For 1-4 unit properties there are even more options including a full 30 yr fixed rate.  And seasoning is less for these properties.

@Brianne H. , You've got some challenges you have to face as a non-US citizen investing in the US.

1. If you do not have resident alien status or already file a return in the US or own a domestic US tax paying entity then you will be subject to FIRPTA withholding on every sale.  That is 15% of the sales price withheld pending your filing of a tax return to get the non-taxed portion of that back.

2. You cannot 1031 exchange Canada to the US or vice versa. You can 1031 from US to US or non-US to Non-US only.  So you'll first have to establish your portfolio here before you can think about selling and 1031ing.

3. One of two exceptions to FIRPTA withholding is if you do a 1031 exchange.  However there are some strange quirks that still make it more difficult of the non-US citizen.


An hour with a US CPA to set up a domestic tax paying entity to hold your US properties would be an hour well spent.

@Brianne H.    I recently wrote an article here on BP talking about many of the questions you are asking.  If you are looking at a 4-unit vs a 5-unit, its a home run for the 4-unit.  30-yr fixed rate financing vs shorter amortization variable rate.  

As @Todd Dexheimer and others have mentioned, the bigger you look the easier it will be to get financing and the terms will start to reflect like 4-unit type terms.  Once you get into the Fannie and Freddie space you'll see the terms much more favorable to you. 

Good luck!

@Brianne H. I'm in Canada as well. I looked briefly into investing in the US in multi-family properties. My understanding is that you'll need to prepare and set up appropriate entity structure to be able to avoid serious tax costs. On multi-unit side, I was planning to participate as one of equity investors. When I started looking at how to set up entities, I learned that it's doable and can be fairly in-expensive, but it would be better to find someone who knows where to start. When I emailed a couple of law firms about this, I got responses like this one: 

Please let me know if you’d like us to send you an engagement letter.

We’d be happy to help if properly retained. Our rates vary between $350 and $1100 per hour and we require a $5000 retainer.

There is no simple way for a CDN resident to invest into a US LLC. This is an extremely complex and evolving area of the law.

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5+ units are commercial loans just look at your bottom line and from the states your naming you have some flights to get on before you make your final decision. Stick to cities with a higher growth potential $500k can go along way but you don't want 200 units that can't be rented 

Originally posted by @Brian Irk :

Hi Brianne,

Welcome to BP. I’m am working on my first commercial purchase too. So I’ve learned a lot in the past month. The biggest difference. Is that >4 units requires commercial lending if done in the traditional sense (i.e. from a bank).

The biggest difference is that in commercial loans, from what I've seen, you cannot get a 15 or 30 yr fixed mortgage. Typically you are looking at one of two options. 1) 7-yr ARM or 2) 5-15 Balloon Which is a 5 year term amortized like a 15 year term with a either a balloon payment or refinance at the end of those 5 years.

So basically the monthly payments are greater and the terms are not as good on commercial properties. The APR might be slightly higher but I believe it's currently within .5 point depending on the lender and borrower. As far as taxes go, unless there are specific state taxes, I'm not aware of any differences from going to 4->5+ units.

Unfortunately I’m not sure about 1031 exchanges. I’ve never done one.

Hopefully this gets you started. Good luck!

Hey Brian.  Shop around and you may find better terms.  20 and 25 year amortization are common in my market.  My commercial loan is fixed for 7 years and then it floats for the next 18...no balloon...25 year term, 25 year amortization.

International taxation is a complex area so you would need the scale to bear legal fees for tax attorneys  and CPAs on both sides of the border. Even the most basic US tax laws around non resident aliens can be quite confusing. Throw in 1031 exchange, domestic versus foreign entity, foreign exchange rate risk etc into the mix and you have one hell of a situation. Of course Canadians invest in the Unites States all the time so I am not discouraging the move, but go into it knowing the complexity and have a plan how you will deal with it. People I have seen investing across borders have the scale and have a professional team to deal with the complexity. 

There are quite a few Canadian investors on BP who have done this successfully - hopefully some of them will chime in with their experiences. 

Thank you all for the replies, and thank you @Andrew Campbell for sharing your article. Sounds like the general consensus is a 4 unit is favourable to the 5+. For the short term, I think I will stick to my original plan of acquiring 4-plexes and see how that goes before deciding to make a big leap into a much larger MF property. 

I haven't yet sat down with anyone who does cross-border taxation, but I certainly will before I get serious about buying. There is a lot to know! 

The selling price of a 1-4units depends on the comps and market price regardless the rental is vacant or not.

However, selling price of a 5+ unit depends on the cap rate or rental income.

If the 5+ unit is vacant or has a low tenant occupancy or has below market rent, the cap rate is not good, affect the selling price price is not good.

If you are not able to raise a lot rent (by more renovations) during the period you own the 5+unit, it is very difficult to make money when selling it,
because the rental income stay the same,
==>
the cap rate stay the same,
==> the selling price stay the same
==> we still lost money on the commission, escrow fee etc. even the selling price and purchase price are the same

Good Cap rate ==> good selling price
Bad cap rate ==> bad selling price

To make money on 5+ unit when selling is,
find an ugly trash 5+ building, buy it at a low price because the cap rate was not good, then make a lot renovations to increase the rent, to have a much better cap rate, then the selling price will be much higher than the purchase price.

Buying a renovated 5+ building at cap rate of 5% is similar to put your money at bank CD of 5% with a lot of landlords work.

Originally posted by @Anna Belov :

@Brianne H. I'm in Canada as well. I looked briefly into investing in the US in multi-family properties. My understanding is that you'll need to prepare and set up appropriate entity structure to be able to avoid serious tax costs. On multi-unit side, I was planning to participate as one of equity investors. When I started looking at how to set up entities, I learned that it's doable and can be fairly in-expensive, but it would be better to find someone who knows where to start. When I emailed a couple of law firms about this, I got responses like this one: 

Please let me know if you’d like us to send you an engagement letter.

We’d be happy to help if properly retained. Our rates vary between $350 and $1100 per hour and we require a $5000 retainer.

There is no simple way for a CDN resident to invest into a US LLC. This is an extremely complex and evolving area of the law.

Hey Anna, 

You need to be careful here, you are asking for advice on international tax to a law firm.

My experience when it comes to professional (legal/accounting) service is that the more you know about what you need, the more be able to (1) vet the professional and (2) ensure his prices are reasonable. 

When you don't know what you want and lawyer are not sure, they go for a expensive retainer.

For entity formation, in addition to the registration cost which is constant, A paralegal will take you $39 and do the work very well, a book written by good lawyers and explaining LLC will cost you $30, a full service lawyer will charge $200 to $400 to set you up.

But these are standard services to residents. Services for non resident are at a different cost level.

I had the same problem as you but from Hong Kong where withholding is 30%.

Given Canadian tax treaty with US, it seems to me that any Corp or Limited Partnership distribution to its foreign members resident in Canada will be 15%. If you buy a share of syndication, this 15% flat rate is probably how you will get taxed, withheld at source once you give a W8BEN to that entity manager. That's the option with 0 setup and ongoing cost, no filing in US.

If you create your own LLC or Partnership, you can elect to declare that income as effectively connected to US activity and file a US tax return for it. So there might be benefits with this approach, but it has a continuing legal and accounting operating cost.

I am not a professional, but can point you to some resources if you PM me, that should help you clue up before you ask a professional.

@todd dexheimer

That  bigger commercial deals are easier to finance than smaller deals seems to be the perception, but the untold truths in most cases are the following:  

1.  you need to partner up with others because you may not have the big downpayment $ required for these bigger deals.    Easier said than done, and for many of us, we don't like the uncertainty of partnering with someone over a decade(s) long commitment.  

2.  Banks do look at your liquidity in giving out these big loans.  You can't have $200 bucks in the bank and do a 3 million loan, I don't care how good a deal you have.    Unless of course you partner up with others (see #1).

3.  Risk is higher because with commercial loans, you are not allowed to make additional payments to pay down the loan over the 5 or 7 or 10 year fixed term.  This is a big disadvantage because for a 25 or 30 year amo, after 10 years, you still have the bulk of the principal left on your loan.   You don't know what rates will be at that time.  So after fixed term is up, you have a problem:  you either refi (what will rates and terms be in 7 or 10 years?) or pay it off (will you have cash and will your partners agree to this?) or sell (1031 it and if so, can you get partners to agree?)    So this is a big risk.  At the end of the day, the goal is to ACTUALLY OWN SOMETHING, rather than juggling debts back and forth for the rest of your life.

I know I'm preaching to the choir, but sometimes I'm frustrated by the insinuation that bigger commercial loans are easier to get....once you get into the game and actually try to get one, road blocks appear left and right.   Unless of course, you are ok with marrying a few strangers for a decade or two on a multimillion commitment.  Not my cup of tea per se but to each his own.  

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