Commercial Lending Terms for 7 unit multi-family property?

[Ernie Sturzinger]

Hey everyone/anyone :)

I am arranging financing on a 7-unit investment property. I wasn't aware of this initially, but it sounds like you can't do conventional loan on 5+ unit properties. So, when I spoke with the bank today, they said that I needed to do a commercial loan since it is 7 units and that there is typically a 25-year term for the mortgage loan, which is fine. But then they say that the term for the interest rate is 5 years and then they will adjust rate every 5 year term thereafter to the market rate. I'm concerned that I cannot lock in a rate that I can depend on long term for this rental and if the interest rate is actually adjusted every 5 years, this basically becomes an adjustable rate mortgage. Is this normal for commercial lending and is this cause for concern? I spoke with this bank today and plan to reach out to other banks tomorrow, but wanted any insights from you all here if possible. My other investment property that is a 3-unit is a conventional loan on a fixed interest rate, so wasn't aware of the commercial loan process and parameters. Any insight is very much appreciated. Thanks!

[David Brent]

I've had the same experience and I looked at over 12 different lenders...  unless you get Agency Financing (fannie, Freddy), your loan will typically be 5 yr, at which point you will need to refi. 

[Account Closed]

There are some lenders can do 30-year fixed for small multifamily. Local bank or credit union can give you low rate, but they typically offer 25-year amortization with 5th year balloon payment.

[Todd Olson]

These terms are common with commercial financing. You just need to refi by the 5th year into a new term. I am doing it now on my 8 unit after 2 1/2 years. Rate was 5.7 now going down to around 4. 

[Stephanie P.]

@Ernie Sturzinger

Recent developments in the DSCR world have opened up multi units to 8 units with 30 year amortizations. Rates are about about a point higher than normal DSCR loans (1-4 units), but you can get a rate in the mid 5's (with decent credit) on, like I said, a 30 year amortization (fixed).

It will cost a few points (probably 3 depending on the loan size) and the appraisal will be a narrative appraisal, so expensive, but they close and cash flow well with the longer amortization.

Find yourself a good commercial broker.

Stephanie

[Alex Bekeza]

@Ernie Sturzinger There are some great 30 year fixed options for small balance commercial out there right now. On a 7 unit you could see 75% LTV & 30 year fixed in the 4s/5s.

[Ernie Sturzinger]

@Alex Bekeza This seems like a good option. I have 5 calls out to banks asking for the 25-30 year term with fixed interest rate over full loan term. Any insight into which banks are doing this? Thanks so much!

[Nicholas U.]

You won't likely find any banks able to do a loan on a property with more than 4 units over 10 years.  You might be able to get a 30 year amortized loan over 10 years meaning you are making payments like it is a 30 years but it is due in 10.  At end of life you generally refinance.

[Ernie Sturzinger]

Thanks everyone. I just spoke with a bank here in the Pacific Northwest that does a 20 year term and has a fixed interest rate for the 20 years. Looking to move forward with this bank as it is more money monthly towards the loan amount compared to a 30-year term, but can lock in the interest rate at 4.25%. Thanks for feedback everyone. Very helpful and appreciate all of your time/effort. Have a great day!

[Mike Cahill]

@Ernie Sturzinger

I am a commercial lender in NJ and what most of the folks said here is correct, with commercial, most banks will go maybe ten years fixed max. a five year rate with the reset in year 6 is a very common structure. amortization usually 25 years. some banks will do 30 for multifamily.

[Corey Frank]

@Todd Olson sorry if this is a naive question.. I am a newb who is gearing up to invest in multi family 4 and under so I don’t really understand how commercial lending works. Do you find these type of terms risky? What can a person do to hedge their risk if interest rates went crazy in the next few years as raised their mortgage payment significantly?

[Nicholas U.]

Originally posted by @Corey Frank:

@Todd Olson sorry if this is a naive question.. I am a newb who is gearing up to invest in multi family 4 and under so I don’t really understand how commercial lending works. Do you find these type of terms risky? What can a person do to hedge their risk if interest rates went crazy in the next few years as raised their mortgage payment significantly?

If you are planning 4 units or under a residential fixed 30 year loan should be available with 20-25 percent down.

Commercial property is inherently more risky so this protects the bank.  You can always refinance or attempt to fully pay off by end of loan but there is no guarantee that interest rates won't go up.

[Todd Olson]

@Corey Frank if you plan on staying at 4 and under then you should just get a 30 year fixed conventional loan for them. 5 and over classifies as commercial property. Usually not always, need 25% down and term is 25 years. After 5 years you will need to refinance or balloon payment. This is not always the case but just a general guideline. Hope this helps. Good luck. 

[Stephanie P.]

Originally posted by @Todd Olson:

@Corey Frank if you plan on staying at 4 and under then you should just get a 30 year fixed conventional loan for them. 5 and over classifies as commercial property. Usually not always, need 25% down and term is 25 years. After 5 years you will need to refinance or balloon payment. This is not always the case but just a general guideline. Hope this helps. Good luck. 

Not a realistic guideline anymore.

Conventional financing is approaching DSCR and if you want to factor in hassle vs. no hassle, there is no comparison; DSCR vs Fannie is a no brainer; DSCR all day long.

30 year amortization is widely available with rates in the 4's and 5's on a 30 year fixed amortization up to at least 8 units and sometimes 12. Yes, 25% down, but no balloons, no ARM's; 30 year fixed.

I have 3 of in my pipeline of 20 right now.

Stephanie

[Todd Olson]

@Stephanie P. that’s good to know. I am looking at a 12 unit now. Trying to look for a better option than putting 25% down on it since rates are good. Have you seen 20% loans for this many units?

[Corey Frank]

@Todd Olson Thanks!

[Stephanie P.]

Originally posted by @Todd Olson:

@Stephanie P. that’s good to know. I am looking at a 12 unit now. Trying to look for a better option than putting 25% down on it since rates are good. Have you seen 20% loans for this many units?

No. Only on hard money for rehab and then you're capped at 75% of the ARV.

[Ernie Sturzinger]

@Stephanie P. thanks for the information! Do you have any banks that you work with that do 30 year amortization and 30 year fixed interest rate for a 7-unit multi-family? Any leads would be appreciated. Thanks so much!

[Stephanie P.]

Originally posted by @Ernie Sturzinger:

@Stephanie P. thanks for the information! Do you have any banks that you work with that do 30 year amortization and 30 year fixed interest rate for a 7-unit multi-family? Any leads would be appreciated. Thanks so much!

Hey Ernie

It's not a bank product.  They generally do fully documented loans and have either balloons or shorter amortization periods.

I sent you a PM to discuss.

Stephanie

[Will Gaston]

@Ernie Sturzinger look at this as a great opportunity to learn about the commercial lending side.

I am huge fan of portfolio lenders and commercial lending in general. 

My experience is it is much more reasonable and easy to secure financing. The balloons are a downside but it is rare that banks won't renew notes if the borrower is performing and the debt service coverage is sufficient.

[Michael A.]

@Todd Olson When you refi after each 5 year increment of time, do you have to essentially pay closing costs to do so? Seems like it would eat into your bottom line. I’m interested in looking at commercial and multi family so I appreciate your insight.

[Todd Olson]

@Michael A. I am meeting with my banker next week to discuss a cash out refi and possible purchase of a larger building. Will know then about closing costs. 

[Fernando Corona]

hi everyone, just to resurface this. there are 30yr terms for 1-8 units DSCR. I'm doing a 7 unit for a client right now. of course interest rates are wild in this market compared to what you all were talking about 2years ago lol but just wanted to let you know about this. reach out if deeper questions.

[Zachary Ware]

There are 30-year fixed rate options in the DSCR space for up to 10 units. Check out this article on BP https://www.biggerpockets.com/blog/multifamily-dscr-loans that goes into more detail.