How are these terms on a commercial multifamily loan?

Rental Property Investor · San Jose, CA · Member since 2017 · 37 posts · 11 votes

Hello everyone. I'm in the hunt for a commercial multifamily under $525k and I've been offered 7.99%, 30 year fixed with 25% down. Is this in line with what you all are seeing out there? Thanks!

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Syed H.

Developer · NY/NJ/PA · Member since 2018 · 758 posts · 935 votes

These are all bad rates. But that’s also because 30 year products barely exist for commercial RE. Are they also charging any points up front? You are basically getting hard money.

My rates are between 3.5-2.75% for 5-10 year fixed, 25 or 30 year amortization. Depends on size of deal, location, and other deal metrics.

Even if you believe rates will be higher later (which I don't believe they will by a meaningful amount since the fundamentals of borrowing has changed), there is a reason 30 year product barely exists for commercial.

Most borrowers don’t WANT it. Why would you lock yourself into a 30 year loan when you can refi out equity every 5-10 and used it to purchase more property? Even if rates are higher, cap rates will be as well and should theoretically have similar yields.

30 year fixed is for homeowners to think they can afford more house than they actually can. I would never get a 30 yr fixed on my rental portfolio

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Joel OwensBusiness Member
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Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
6y
Sounds really high like private money terms almost except the 30 year fixed part. Smaller loans tend to have higher interest rates but that is up there.
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Simon Hernandez
OP
Rental Property Investor · San Jose, CA · Member since 2017 · 37 posts · 11 votes
6y
Originally posted by @Joel Owens:
Sounds really high like private money terms almost except the 30 year fixed part. Smaller loans tend to have higher interest rates but that is up there.

Thanks, Joel. I'm drawn to the 30 year fixed aspect for sure. Is that common for commercial multifamily? I feel like most are 5-10/20-30 balloon. Seems like a good idea to lock in at todays low rates but I rarely hear people talk about this loan product.
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Erik Hatch
Rental Property Investor · USA · Member since 2018 · 325 posts · 222 votes
6y
How many units @Simon Hernandez ?
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Corey Hawkinson
Rental Property Investor · Bloomington, MN · Member since 2019 · 404 posts · 542 votes
6y
@Simon Hernandez By commercial multi family, I’m assuming you mean more than 4 units, correct? At that price point I wasn’t sure. The rate seems high. For comparison, I was just offered 5.9%, 25 year amortization, but that would only be locked in for 7 years. And I’m a small time player.
I was able to change a few things around with the property to allow for conventional financing instead of commercial financing. That was the only commercial quote I received before going with 30 year fixed at 4.65%, but again, what I went with wasn’t commercial.
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Simon Hernandez
OP
Rental Property Investor · San Jose, CA · Member since 2017 · 37 posts · 11 votes
6y
Originally posted by @Erik Hatch:
How many units @Simon Hernandez ?

6 units in San Antonio.
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Simon Hernandez
OP
Rental Property Investor · San Jose, CA · Member since 2017 · 37 posts · 11 votes
6y
Originally posted by @Corey Hawkinson:
@Simon Hernandez By commercial multi family, I’m assuming you mean more than 4 units, correct? At that price point I wasn’t sure. The rate seems high. For comparison, I was just offered 5.9%, 25 year amortization, but that would only be locked in for 7 years. And I’m a small time player.
I was able to change a few things around with the property to allow for conventional financing instead of commercial financing. That was the only commercial quote I received before going with 30 year fixed at 4.65%, but again, what I went with wasn’t commercial.

As I mentioned above, 6 units. Was yours 4 or below? If not, what did you change to allow the conventional financing, if you don't mind me asking?
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Syed H.
Developer · NY/NJ/PA · Member since 2018 · 758 posts · 935 votes
6y
These are all bad rates. But that’s also because 30 year products barely exist for commercial RE. Are they also charging any points up front? You are basically getting hard money.
My rates are between 3.5-2.75% for 5-10 year fixed, 25 or 30 year amortization. Depends on size of deal, location, and other deal metrics.
Even if you believe rates will be higher later (which I don't believe they will by a meaningful amount since the fundamentals of borrowing has changed), there is a reason 30 year product barely exists for commercial.
Most borrowers don’t WANT it. Why would you lock yourself into a 30 year loan when you can refi out equity every 5-10 and used it to purchase more property? Even if rates are higher, cap rates will be as well and should theoretically have similar yields.
30 year fixed is for homeowners to think they can afford more house than they actually can. I would never get a 30 yr fixed on my rental portfolio
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Simon Hernandez
OP
Rental Property Investor · San Jose, CA · Member since 2017 · 37 posts · 11 votes
6y
Originally posted by @Syed H.:
These are all bad rates. But that’s also because 30 year products barely exist for commercial RE. Are they also charging any points up front? You are basically getting hard money.
My rates are between 3.5-2.75% for 5-10 year fixed, 25 or 30 year amortization. Depends on size of deal, location, and other deal metrics.
Even if you believe rates will be higher later (which I don't believe they will by a meaningful amount since the fundamentals of borrowing has changed), there is a reason 30 year product barely exists for commercial.
Most borrowers don’t WANT it. Why would you lock yourself into a 30 year loan when you can refi out equity every 5-10 and used it to purchase more property? Even if rates are higher, cap rates will be as well and should theoretically have similar yields.
30 year fixed is for homeowners to think they can afford more house than they actually can. I would never get a 30 yr fixed on my rental portfolio

Thanks for your input, Syed. I guess my thought was that there's pretty much only one way for rates to go from here (not counting negative rates) so why not lock it in for 30 years (not with an unreasonably high rate, of course). Could you not refi out of a 30 year fixed every 5-10 years just the same?
1 Reply
Syed H.
Developer · NY/NJ/PA · Member since 2018 · 758 posts · 935 votes
6y
Originally posted by @Simon Hernandez:
Originally posted by @Syed H.:
These are all bad rates. But that’s also because 30 year products barely exist for commercial RE. Are they also charging any points up front? You are basically getting hard money.
My rates are between 3.5-2.75% for 5-10 year fixed, 25 or 30 year amortization. Depends on size of deal, location, and other deal metrics.
Even if you believe rates will be higher later (which I don't believe they will by a meaningful amount since the fundamentals of borrowing has changed), there is a reason 30 year product barely exists for commercial.
Most borrowers don’t WANT it. Why would you lock yourself into a 30 year loan when you can refi out equity every 5-10 and used it to purchase more property? Even if rates are higher, cap rates will be as well and should theoretically have similar yields.
30 year fixed is for homeowners to think they can afford more house than they actually can. I would never get a 30 yr fixed on my rental portfolio

Thanks for your input, Syed. I guess my thought was that there's pretty much only one way for rates to go from here (not counting negative rates) so why not lock it in for 30 years (not with an unreasonably high rate, of course). Could you not refi out of a 30 year fixed every 5-10 years just the same?

Even if rates go up by 2%, you just spent 3.5% more than me for the next 10 years. Also you don’t have the flexibility I do. I can refi at year 5, 7, or 10, take my money out, pay an extra 2% and buy a property that has a 2% higher cap rate.

You might be able to refi but it depends on how it’s structured. Many of the long term loans I’ve seen have yield maintenance or defeasance, which is very expensive and annoying to get out of. Some have basic prepayment penalties, but still is costly.
2 Reply
Corey Hawkinson
Rental Property Investor · Bloomington, MN · Member since 2019 · 404 posts · 542 votes
6y
@Simon Hernandez My purchase was 4 units, so what changed wouldn’t help you out. The property is two duplexes, but the lots weren’t properly set up for that. Because of that, conventional lenders wouldn’t finance it. We got the lot lines fixed and then changed it to 2 purchases instead of 1.
0 Reply
Simon Hernandez
OP
Rental Property Investor · San Jose, CA · Member since 2017 · 37 posts · 11 votes
6y
Originally posted by @Syed H.:
Originally posted by @Simon Hernandez:
Originally posted by @Syed H.:
These are all bad rates. But that’s also because 30 year products barely exist for commercial RE. Are they also charging any points up front? You are basically getting hard money.
My rates are between 3.5-2.75% for 5-10 year fixed, 25 or 30 year amortization. Depends on size of deal, location, and other deal metrics.
Even if you believe rates will be higher later (which I don't believe they will by a meaningful amount since the fundamentals of borrowing has changed), there is a reason 30 year product barely exists for commercial.
Most borrowers don’t WANT it. Why would you lock yourself into a 30 year loan when you can refi out equity every 5-10 and used it to purchase more property? Even if rates are higher, cap rates will be as well and should theoretically have similar yields.
30 year fixed is for homeowners to think they can afford more house than they actually can. I would never get a 30 yr fixed on my rental portfolio

Thanks for your input, Syed. I guess my thought was that there's pretty much only one way for rates to go from here (not counting negative rates) so why not lock it in for 30 years (not with an unreasonably high rate, of course). Could you not refi out of a 30 year fixed every 5-10 years just the same?

Even if rates go up by 2%, you just spent 3.5% more than me for the next 10 years. Also you don’t have the flexibility I do. I can refi at year 5, 7, or 10, take my money out, pay an extra 2% and buy a property that has a 2% higher cap rate.

You might be able to refi but it depends on how it’s structured. Many of the long term loans I’ve seen have yield maintenance or defeasance, which is very expensive and annoying to get out of. Some have basic prepayment penalties, but still is costly.

Excellent!! Yield maintenance and defeasance are two new terms for me. Thanks for the education!
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Simon Hernandez
OP
Rental Property Investor · San Jose, CA · Member since 2017 · 37 posts · 11 votes
6y
Originally posted by @Corey Hawkinson:
@Simon Hernandez My purchase was 4 units, so what changed wouldn’t help you out. The property is two duplexes, but the lots weren’t properly set up for that. Because of that, conventional lenders wouldn’t finance it. We got the lot lines fixed and then changed it to 2 purchases instead of 1.

May not help me out on this one but certainly could help my next deal. Thanks!
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Matt H.
Real Estate Broker · CA · Member since 2016 · 243 posts · 226 votes
6y
@Simon Hernandez that’s double market. And I would get a 5/1, it’s the right product for our investments. I just locked a 3.87% 7/1 no cost no balloon. Chase.
2 Reply
Erik Hatch
Rental Property Investor · USA · Member since 2018 · 325 posts · 222 votes
6y
As @Syed H. said those rates are too high. Find a commercial broker and go for a shorter term. Force appreciation and by increasing noi and then refi.
1 Reply
Simon Hernandez
OP
Rental Property Investor · San Jose, CA · Member since 2017 · 37 posts · 11 votes
6y
Thanks @Matt H. and @Erik Hatch. Would my being a first time commercial borrower affect the terms/rate if the numbers work look good on the deal?
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Matty Foley
Lender · Frederick/Montgomery County, MD · Member since 2019 · 56 posts · 46 votes
6y
@Simon Hernandez if you went through a commercial bank and depending on the strength of the deal you would be looking at:
-Low to mid 4’s rate
-5-10 year fixed (more likely 5-7).
-Up to 25 year Amortization
-Half point to a 1 point origination fee (quarter point if you a strong)
-Some type of prepayment penalty (5,4,3,2,1 / 3,2,1,1,1)
It’s a tough call. I’d go with the short term for cash flow purposes right now now and take the gamble that rates will not increase that rapidly. At the moment and for the next few years at least (would be my guess), you are stuck with a terrible rate by accepting that.
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Simon Hernandez
OP
Rental Property Investor · San Jose, CA · Member since 2017 · 37 posts · 11 votes
6y
Thanks for the breakdown @Matty Foley. Sounds like I have some more loan shopping to do. The original property I was looking at fell through so I'm starting from square one.
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Brandon Hicks
Investor · Avilla, IN · Member since 2013 · 796 posts · 769 votes
6y
@Simon Hernandez
$500k at 7.99 on a 30 is $3665
$500k at 5.0% on a 20 is $3299
I can get the 20 locked for at least 5 years. I think I’d much rather take that option vs your 30
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Tab Teehee
Rental Property Investor · Lake Suzy, FL · Member since 2018 · 171 posts · 216 votes
6y
@Simon Hernandez
Might try local small banks...I just closed on a multifamily (20 units) with a small local bank @ 4.25%, 20 year amortization and 10 year fixed term and .5% origination fee
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Steve K.
Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes
6y
Build a relationship with a local credit union. I was just quoted 4.25%, 25% down, 10 yr. fixed, 25 yr. am, .25% origination, no prepayment penalty (for an 8 unit, ~$1M). I've been told multiple times that 30 yr. fixed doesn't exist for commercial so I learned something from you that it does. I'd actually really like a 30yr. fixed personally, but certainly not at 7.99% when market rate is in the 4's. This being your first commercial deal shouldn't be a limiting factor as long as you have some experience with smaller buildings so the underwriter can check the "experienced operator" box. They typically focus their underwriting more on the details of the building itself (age/condition, NOI, location, local market, stability, etc.)
2 Reply
Jonathan Taylor
Lender · Los Angeles, CA · Member since 2017 · 916 posts · 647 votes
6y
@Simon Hernandez that sounds like a bridge or construction loan. Will you doing value add? What kind of experience do you have and Is it stabilized? Sometimes lenders have higher rates for inexperience or risky endeavors but if it’s stabilized or slightly under market that rate is high.
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Judy Parker
Rental Property Investor · Closter, NJ · Member since 2015 · 884 posts · 722 votes
6y
7.99% interest is way too high.
Should be under 5% (unless you have bad credit)
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Todd Dexheimer
Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
6y
Originally posted by @Simon Hernandez:
Hello everyone. I'm in the hunt for a commercial multifamily under $525k and I've been offered 7.99%, 30 year fixed with 25% down. Is this in line with what you all are seeing out there? Thanks!

I would continue to look around. That is the most expensive interest rate that I have seen in 12+ years (besides hard money and bridge). I am assuming this is a local bank. Call a few dozen local banks to figure out what others are offering. You can also negotiate with them to get better terms and rates.
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Kyle Lecy
Investor · Southwest MN · Member since 2018 · 15 posts · 4 votes
6y
@Simon Hernandez
This seems high for a commercial loan with 25% down. 5-6.5% is the range I've seen/experienced. Not knowing how the lender risk rates, or the credit scenario, 7.99% isn't implausible, but it does seem high for an average borrower.
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Stephanie P.Pro Member
Washington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes
6y
Originally posted by @Simon Hernandez:
Hello everyone. I'm in the hunt for a commercial multifamily under $525k and I've been offered 7.99%, 30 year fixed with 25% down. Is this in line with what you all are seeing out there? Thanks!

Those are NORMAL rates for a no income verification, commercial loan.
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