Commercial Loan for a 5-unit building in NJ

11 Replies

Hi there, I currently own two single family rental properties and was recently approached about purchasing a 5-unit building in the same town.  The listing notes state that only commercial loans can be used.  I have zero experience in commercial loans and would love any general advice, watch outs etc. The asking price for the property is $785,000 and monthly rents currently total $5,500.  Thanks!  

Normally, commercial property needs to DCR (Debt Cover Ratio, basically property needs to support the loan). Looking at your scenario, you may run into an issue there. Lenders like to be anywhere from 1.20-1.25+ (there are variances) on Multi Family. Based on the current rent roll you have, its looks like you are going to need a down payment closer to 50% in order to make that work. There are lenders out there that have No DCR requirements for commercial loans with $500,000 loan amounts or less, might be worth looking into

hello Andrew ,fortunately the lending guidelines are very relaxed in todays real estate climate,their are stated income loans available  

In my (very limited) experience, as long as you have 20% to put down and a steady job the bank will back you on a commercial loan. The more you have to put down the more likely they are to approve.

20-25% down should be fine. Usually small local bank will have a good rates and commercial loan broker will help you to fine a good rate. Rent seems to be little bit low but if you could increase rent, it should be fine. My local bank gave me 4.75 interest rate this week.

@Andrew Bolton One large (practical) difference is that they typically operate on a 20 or 25 year amortization table.  So if you're putting down 25% then your monthly debt at 5% interest would be $3,442 or $3,885.  If your gross rents are $5,500 I would imagine you'll have a challenge servicing your debt, operating the property, and still making a decent return.  When you run into 5-plexes you can hit issues with non-metered utilities (i.e. you pay them all!), landscaping, trash, dumpster fees, etc.  It really depends on the property and town when it comes to how much these impact you.

Sorry @Ryan O'Mara but that's not the calculation for DCR. DCR is net operating income (gross rents less all expenses including taxes and insurance) divided by the debt service (just the principal and interest payment). The lender wants to see that the net operating income (NOI) will fully cover the debt service and leave something left over.

@Jon Holdman - you're right. For pure commercial properties there may often be more expenses than just taxes and insurance and so the DSCR calculations will be more complex.

For simple 1-4 unit properties my above formula is what most lenders would use.  But this post is about a 5 unit so it may not apply.  So my previously hurriedly posted comment comes with further qualifications.

EVERY property has more expenses than taxes and insurance.  There's no "may" to it.

I do understand that lenders use the formula "net income = (75% * gross rent) - PITI" to estimate net income on a new property. But I've never seen DSCR = gross rents / PITI. You list your occupation as lender, though, so you must know something I don't.

In my experience, for multi units, office, retail, DCR is calculated from the NOI (total income less expenses) less the Principal & Interest payment. Professionally, I don't DCR 1-4 units. I have a great excel spread sheet that I am happy to share. You'll have to reach out online if you are interested.