Conventional or Commercial Loan on my Quadplex?

6 Replies

Hey guys,

I am now shopping around for lending on the Quadplex. On the podcasts I hear conventional vs. commercial and understand the pros and cons of both.

I am wondering what you guys are doing. This is my first Quadplex and everyone I am talking to about a conventional loan needs 25-30%. Should I do a commercial loan even though the rates are generally higher?

Thanks

Pat, my view is, if possible do a conventional loan. You can’t get cheaper rates than right now. Most commercial loans tend to be higher rates and on ballon terms. I have used commercial financing for years, and have spent this year looking for quality long term hold property I can lock in for 15 or 30 year rates.

@Pat Peri commercial loan will require 20%-25% down payment as well. If you can qualify to a conventional loan, there is only one reason I can think of to go commercial ovar conventional and that is that a commercial loan will be against an LLC while a conventional loan will require your personal name.

The question you need to ask yourself is does it worth it to get a reduced return for that LLC protection?

@Joseph Gozlan that makes sense. Eventually once I own more than one I would like to place it into the LLC.

Originally posted by @Pat Peri :

Hey guys,

I am now shopping around for lending on the Quadplex. On the podcasts I hear conventional vs. commercial and understand the pros and cons of both.

I am wondering what you guys are doing. This is my first Quadplex and everyone I am talking to about a conventional loan needs 25-30%. Should I do a commercial loan even though the rates are generally higher?

Thanks

 @Pat Peri: Pat, this is a residential property - 4units or less is residential, 5 units or more is commercial. You will not be able to get a commercial loan on this. Anyway, why would you want to? The terms for a residential loan are far better - better interest rate, longer amortization period, lower down payment. 

@Pat Peri : I'm financing a 4-plex right now. Conventional residential financing is a pretty big win, almost anyway you slice it. 

The only drawback is, like you mentioned, you may be required to put down 30% (not 20-25 that you might get from a portfolio lender) because it's a quad and non-owner occupied.

On the plus side, you get a 30-year fully amortized, fixed-rate loan at rock-bottom rates, as opposed to a 10 year term with a 25 year amortization. And you don't have to call a bunch of lenders one-by-one. Just hop onto zillow mortgages, and search and sort to find the best one that day.

The issue with not being able to put the loan against an LLC is only kind-off an issue. If you will initially be purchasing it in your own name, you can finance it just fine with a residential loan. What many people do is transfer the property to an LLC after the loan is closed. Technically, the lender could "call" the loan due immediately, because it's technically a transfer, however i hear it's very rare, and I've never heard of it happening to anyone (that's probably worth a separate post to the forums just to make sure!)

The one other benefit that I didn't see anyone else mention is that conventional loans are usually non-recourse, whereas many portfolio lenders will only do recourse loans.

Hope that helps!

James

Updated 3 months ago

People are finding this post in the archives, and finding it helpful, so I'd like to make an important correction: What I said about residential loans being non-recourse only applies to a few states, like CA (where I live.) In MOST states, residential mortgages will be full-recourse. Sorry for the incorrect info!

All good points mentioned above. We have found that thorough research and understanding of the various types of lending out there allows you to fit a particular property/deal to a particular type of lending that best suits it. If I come across a small multifamily that needs rehab and I need to move quickly on, national hard money lenders can work well for that. Patch of Land, RCN Capital, Lima One, Corevest are just some of the big players out there that only look at your credit score (no DTI or income), mandate you hold it in an entity (LLC, etc), and can underwrite within two or three weeks. Is there a cost for this flexibility? Of course. But if factored in on the front end, and strictly for use in acquiring and repositioning a property so that you can rehab, lease up, and season in preparation for refi’ing on to permanent debt service, a 1-2 year interest only product has its place in the market. Another point that I rarely hear mentioned, is that commercial loans keep mortgages off of your personal balance sheet. This can be a factor depending on your situation, but in mine, going through a drawn out underwriting process everytime I buy a property is just annoying. Constant calls to my full time employer for employment verification, hard queries to my (and my wife’s) credit report (the wonders of community property states), etc etc. The point is there is something to be said for keeping the real estate business separate from your personal financial life on paper. So that when you go to get a new car, those rental properties don’t potentially affect your ability to qualify. Just something to consider that I don’t often hear people take note of.

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