Interest only DSCR Loan for multifamily vs commercial balloon

[Rajeev Samuel]

Hi all, 

I'm looking to do my first investment property soon and while I was looking for a SFH or small multifamily, an off market 5-plex was presented to me that could be a good deal if I can figure out financing.

Cost is tentatively 300K with current rent being $3000 a month, with potential to bring up to $3500-3750 a month.  So decent cashflow even as it stands now. The two options I have identified are a more typical commercial loan at 15%-20% down, around 7.3% interest with a 5 year balloon.  To be honest, the 5 year balloon kinda freaks me out as I believe there is a good chance interest rates continue to rise during that time. 

The other interesting option I am considering is an interest only DSCR loan. The interest rate is actually lower with this loan at 6.5%, and with the interest only option, cash flow would be larger of course with the option for me to make lump sum payments towards the principal if I choose. These are the terms of the DSCR loan I am considering.

• 5, 7, or 10-year ARM program (30 year loan, interest only)
• 80% loan-to-value maximum on purchase
• 80% loan-to-value maximum on rate and term refinance
• 80% loan-to-value maximum on cash out refinance
• Rates starting at 5.5% at lowest LTV max LTV is 6.5%

I was contemplating the 7 or 10 yr ARMs and hopefully I would be able to sell or refinance in that timeframe.    What are your thoughts and/or advice. Again, total newbie here and this would be my first property.  

Thanks in advance!!

[Nick Belsky]

@Rajeev Samuel

3.5 points is a bit steep. Yes, there are 30yr fixed rate mortgage options for 5+ unit as well. No balloons, I/O, or funny business. 20-25% down is typical on the FRM. Keep in mind, many wholesale lenders can finance 5-8 unit multifamily under non-commercial loans. The rates will typically be a little higher than their 1-4 unit programs, but they can and will do them on 30yr fixed terms.

There are also commercial options out there that do not have balloons.  This past week I was quoted and submitted a loan with 10yr Terms.  Fixed Rate at 6.45%, amortized over 30 years.  No balloon and with 2pts, including my broker fee.  At the end of the 10yr term, the borrower can refi or extend into another 5yrs if they choose.

Keep shopping around.  Reasonable terms are still out there will all the added costs to buy down rates.

Cheers!