First Investment Property - Commercial vs Conventional Mortgage
Member since 2020 · 5 posts · 1 vote
First Investment Property - Commercial vs Conventional Mortgage
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Robin SimonBusiness Member
Lender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votesQuote from @Presley Balestreri:
First Investment Property - Commercial vs Conventional Mortgage
I have been researching and trying to decide on a lender/Type of mortgage for my first property. I would like to get pre-approved so I can be ready to purchase when the time is right.
My Property goals are to start and scale up to multiple investment properties over time. I am unsure if I should just start with a commercial loan under an LLC as to not affect my personal DTI. This may be overkill to start with, which is why I am debating for my first property to keep it simple and get a Conventional personal loan. My main concern being, that it would affect my ability to purchase other properties in near future. I am looking in the Memphis/Cleveland markets, Any and all feedback or Lender recommendations are appreciated
Generally (as always caveat is everybody's situation is different and not 100% the right choice for everyone) is for your first 1-4 properties (assuming you have a W2 and qualify), you should go with conventional lending as those will be the best rates and terms, and then when you are ready to scale (5+ properties, use an LLC, or ready to quit W2 and go RE full time, etc.) thats when you go commercial/DSCR
Harpoon Capital514 Reviews
7 Replies
- 3yGreg ScottPro MemberRental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
You didn't say what type of property you were looking at because that makes a big difference. I presume single family (or duplex, or triplex, or quad).
A conventional mortgage will have much better terms than a bank loan, so most people only go to commercial loans for some other reason, often because they have 10 conventional loans already.
You also have one misconception, which is common, since most mortgage brokers only know how to provide mortgages for owner-occupants. When you buy a rent property, a part of the income from the property is applied to your DTI. If you are buying correctly, your DTI can improve with every property and every mortgage you get.
- Real Estate Agent · Member since 2018 · 459 posts · 414 votes3y
I don't know your financial situation, but I think one thing to consider is that going conventional may be an easier way to get started. Going commercial is not a bad route to go to get started but it could take more capital upfront to get started. Depending on the asset, you may need +20-25% down and including reserves plus you have closing costs. Some may not even lend to new LLC's because they want to see experience, good P&L's, etc (depends on the lender and the asset).
If you go the owner occupied route, that will have the lowest barrier of entry. 0% down to 3.5% down FHA are how a lot of people here got started and were able to scale up leveraging cashflow and equity/appreciation.
If you decide to go the commercial route, I’d try to find partners that have experience! Leverage their experience and see what you can provide them (bring them the deal, be a financing partner, maybe you have the time to manage the property, etc).
If you have a specific property in mind, let us know! We’d love to take a look and help.
Also, lenders are all different, and many have different loan products depending on the market condition, the company they work for, and much more. I’d talk to 3-5 lenders and learn as much as you can from them 👍
- 3yRobin SimonBusiness MemberLender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes
Quote from @Presley Balestreri:
First Investment Property - Commercial vs Conventional Mortgage
I have been researching and trying to decide on a lender/Type of mortgage for my first property. I would like to get pre-approved so I can be ready to purchase when the time is right.
My Property goals are to start and scale up to multiple investment properties over time. I am unsure if I should just start with a commercial loan under an LLC as to not affect my personal DTI. This may be overkill to start with, which is why I am debating for my first property to keep it simple and get a Conventional personal loan. My main concern being, that it would affect my ability to purchase other properties in near future. I am looking in the Memphis/Cleveland markets, Any and all feedback or Lender recommendations are appreciated
Generally (as always caveat is everybody's situation is different and not 100% the right choice for everyone) is for your first 1-4 properties (assuming you have a W2 and qualify), you should go with conventional lending as those will be the best rates and terms, and then when you are ready to scale (5+ properties, use an LLC, or ready to quit W2 and go RE full time, etc.) thats when you go commercial/DSCR
Harpoon Capital514 Reviews - 3yJay HurstBusiness MemberLender · Dallas, TX · Member since 2017 · 1k+ posts · 1k+ votes
Quote from @Presley Balestreri:
First Investment Property - Commercial vs Conventional Mortgage
I have been researching and trying to decide on a lender/Type of mortgage for my first property. I would like to get pre-approved so I can be ready to purchase when the time is right.
My Property goals are to start and scale up to multiple investment properties over time. I am unsure if I should just start with a commercial loan under an LLC as to not affect my personal DTI. This may be overkill to start with, which is why I am debating for my first property to keep it simple and get a Conventional personal loan. My main concern being, that it would affect my ability to purchase other properties in near future. I am looking in the Memphis/Cleveland markets, Any and all feedback or Lender recommendations are appreciated
@Presley Balestreri First you mention the most misunderstood and hand wringing item on this board. Assuming you go with a loan vested in your LLC you will have to personally guarantee the loan. Therefore, it WILL still count against your debt to income ratio. But, who cares! The rental income on the property you are buying will be able to count towards your debt to income. Once you own the property when you go to buy the next property you will be able to use the rental income from the property you already own AND the rental income of the next property. Your debt to income should not be materially harmed when you buy income producing property.
It seems most investors and most loan officers do not understand this for some reason. There are some legitimate reasons for folks to use LLC (although not as many or often the reasons people think, Umbrella insurance is much better liability protection IMO) to buy properties but helping your debt to income is NOT one of these.
Hurst Real Estate, INC4.987 Reviews - 3yStephanie P.Pro MemberWashington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes
Quote from @Presley Balestreri:
First Investment Property - Commercial vs Conventional Mortgage
I have been researching and trying to decide on a lender/Type of mortgage for my first property. I would like to get pre-approved so I can be ready to purchase when the time is right.
My Property goals are to start and scale up to multiple investment properties over time. I am unsure if I should just start with a commercial loan under an LLC as to not affect my personal DTI. This may be overkill to start with, which is why I am debating for my first property to keep it simple and get a Conventional personal loan. My main concern being, that it would affect my ability to purchase other properties in near future. I am looking in the Memphis/Cleveland markets, Any and all feedback or Lender recommendations are appreciated
Full disclosure; I own a brokerage company that only does DSCR lending and fix and flip lending.
Having said that, don't worry about an LLC and get as much conventional financing as you qualify for. Deal with an LLC after you get your 10 properties (or 20 if you're married). Instead of the LLC, get an umbrella liability policy that deals specifically with real estate.
ALWAYS exhaust your conventional financing before you go to DSCR and commercial financing.
Stephanie
- 3yStacy RaskinBusiness MemberLender · Member since 2022 · 1k+ posts · 495 votes
@Presley Balestreri, you're able to get a rental property/DSCR loan that will not use your DTI. Those investment property loans are based on the property rents, down payment and your credit score.
Here's a post where I discuss DSCR loans in more detail:
https://www.biggerpockets.com/...
It really depends on what property you're purchasing and how that will affect your DTI and if that limits your investment options. I'll send you a message.
Bright Skyline518 Reviews - Lender · Manhattan Beach, CA · Member since 2017 · 423 posts · 268 votes3y
Hi @Presley Balestreri,
I'm based in Southern California, but I have started my out-of-state real estate journey in Indianapolis. Now, I have a portfolio of Short Term Rentals and Long Term Rentals. I've started looking at Columbus because my business partners have found success doing Mid Term Rentals there and the returns are solid.
I've also helped other investors with their DSCR loans and flip projects in Columbus. Happy to share my experiences and chat with you more if you're interested.
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