Commercial vs Personal Loans

General Real Estate Investing
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Commercial vs Personal Loans

Bill Hughes
Orlando, FL · Member since 2016 · 16 posts · 3 votes

Hi all, I am just getting started in REI. I have a reno just completed and tenants ready to move in. I had planned to BRRR his one. I also just purchased a second home for reno that might be more qualified for a flip. To finance the first reno and purchase the second, I used a combo of personal savings, no interest credit cards and a HELOC against my primary residence with a plan to consolidate through a refi of reno #1 once I had tenants in. I spoke to the bank yesterday and they are eager to help me with lending, but they are strongly suggesting that I continue with another HELOC (no closing costs and 2.99 rate with option to rate lock blocks of debt) against my primary residence since I have more than enough equity there. They're claiming that this would be easier and provide a better rate than a commercial loan (which would be required to refi reno #1 because it's not my primary residence). Something doesn't feel quite right to me about going deep into debt on my primary residence but, looking for some sage advice.

Options:
- Go with another HELOC on primary residence to fund second reno and consolidate debt
- push for a commercial loan on 1st reno

- Other?

Thanks in advance!

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Moshe H.
Rental Property Investor · Ramapo, NY · Member since 2016 · 243 posts · 108 votes
9y

Why do you need a commercial loan? It sounds like you are talking about a single family investment property. You should be able to get 30 year financing on that as a residential investment property and only pay something like .75%-1% above owner occupied rates. Commercial is necessary for 5+ units and usually comes with shorter terms, adjustable rates and/or balloons.

So, why take more equity out of your primary and put that on the line when you can get a loan backed by your investment property, which won't put your primary at risk (or at least less risk - depends on your entity structure).

You said you talked with a bank... maybe approach a broker, who will have access to many banks and can find you a better financial product. Refi the investment house, pay off the credit cards and as much of the HELOC as you would like, then take money out of your line again for the next house and repeat. Additionally, once you have the mortgage on your investment property secured, you can use the equity in your primary to purchase even more investment properties. According to the bank's strategy, you're tying up equity in your investment property and leaving it sitting there.

Hope that made some amount of sense. I don't know if it's "sage advice" but it's one guy's opinion :)

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  • Moshe H.
    Rental Property Investor · Ramapo, NY · Member since 2016 · 243 posts · 108 votes
    9y

    Why do you need a commercial loan? It sounds like you are talking about a single family investment property. You should be able to get 30 year financing on that as a residential investment property and only pay something like .75%-1% above owner occupied rates. Commercial is necessary for 5+ units and usually comes with shorter terms, adjustable rates and/or balloons.

    So, why take more equity out of your primary and put that on the line when you can get a loan backed by your investment property, which won't put your primary at risk (or at least less risk - depends on your entity structure).

    You said you talked with a bank... maybe approach a broker, who will have access to many banks and can find you a better financial product. Refi the investment house, pay off the credit cards and as much of the HELOC as you would like, then take money out of your line again for the next house and repeat. Additionally, once you have the mortgage on your investment property secured, you can use the equity in your primary to purchase even more investment properties. According to the bank's strategy, you're tying up equity in your investment property and leaving it sitting there.

    Hope that made some amount of sense. I don't know if it's "sage advice" but it's one guy's opinion :)

    2Reply
  • Bill Hughes
    OP
    Orlando, FL · Member since 2016 · 16 posts · 3 votes
    9y

    @Moshe H. That's a huge help actually and so simple. For some reason, I hadn't considered keeping the HELOC alive but that makes total sense and I also hadn't considered speaking with a broker. i'll go back to the bank first and make it clear that this is what I'd like to do. I may need to adjust the HELOC limit as it's set conservatively at $30k at the moment but otherwise this seems like it would get me exactly where I want to be.

    1Reply
  • Alice K.
    Investor · San Francisco, CA · Member since 2015 · 306 posts · 211 votes
    9y

    I'm no expert lender but if the commercial loan isn't nonrecourse (you are still on the hook regardless), you might as well go the residential way. As @Moshe H. mentioned, commercial loans tend to have higher interest rates and balloon payments after 5 / 10 years. 

    Agreed too, perhaps you can shop around for other residential options. 

    I would go with option #1 in your list and then once the rehab is done, get it refi'ed and pay off most of the HELOC (assuming this deal won't overextend you) if the rates are super high. Or, heck, keep using that money.

    2Reply
  • Bill Hughes
    OP
    Orlando, FL · Member since 2016 · 16 posts · 3 votes
    9y

    one (probably silly) question @Moshe H.  When you say "30 year financing" you are referring to a conventional mortgage?  (ie.  subject to closing costs, points etc?)

    0Reply
  • Gabriel Haney
    Lender · Boulder, CO · Member since 2017 · 8 posts · 4 votes
    9y

    I would leverage your primary residence. Cheapest money and hardest to come after. I would just make sure your not getting a teaser rate on Heloc because if the rate jumps your blended rate would most likely be higher than refinancing the rental.

    1Reply
  • Moshe H.
    Rental Property Investor · Ramapo, NY · Member since 2016 · 243 posts · 108 votes
    9y

    yes @Bill Hughes I'm talking about a 30-year amortization and a 30-year term. I got one recently on a 4-unit investment property, voluntarily paid 1 point to lower the interest rate by a quarter of a point, and did have to pay a few thousand in closing costs.

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  • Moshe H.
    Rental Property Investor · Ramapo, NY · Member since 2016 · 243 posts · 108 votes
    9y

    Interesting perspective @Gabriel Haney. I agree @Bill Hughes should look closely at all his options.

    0Reply
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