Commercial Loans for under 10 units

[Welsh Tucker]

I am invested in the single family space but looking to expand into 5+ unit properties. My questions are around the loan terms. Here’s an example of a property I’m looking at: $600K list price with 6 units. 

With commercial loan terms being mostly around 5-10 years, I get worried about what happens at the end of that term especially with interest rates where they are. My understanding is that at the end of the 10-year term, you have a few options: refinance, sell or pay the property off.

I would prefer a 30-year fixed loan like what we see in residential - is it easy to get a product like this for a property like the one above and is the rate different?  What do investors typically do for this type of property? Just get the shorter term and refinance?

I’ve always liked the idea of having the property paid for in full at the end of its term. 

[Stacy Raskin]

@Welsh Tucker, it's possible to get a fixed 30 or 40 year DSCR loan. Generally there are programs that have rates and guidelines for 1-4 units and separate rate and guidelines for 5-8 units.

DSCR loans are based off of down payment, credit score and either actual or market rents so it helps to supercharge an investor's real estate goals and net worth as it doesn't consider borrower income or borrower debt to income (DTI) ratios.

Here's a bit more in detail about how rates are calculated for DSCR loans:

1. Credit score- the higher the best. 760+ generally gets best pricing for investment property loans with most lenders

2. Loan to value ratio: The higher the loan to value ratio (LTV) is, pricing takes a hit. So your pricing will be higher for a 80% LTV loan than for a 60% LTV loan.

3. Are you cash flowing the property? Is your DSCR ratio greater than 1-meaning are you cash flowing. Many lenders will not do a DSCR loan unless cash flowing. If they will do a loan with less than 1, the pricing takes a hit.

4. Length of prepayment penalty- Generally prepayment penalties run from 1-5 years. The longer the prepayment penalty term the less of an impact on the rate.

I've included an example below to help illustrate this.

So different lenders have different rates (which do vary even for DSCR loans) but these are factors they all consider.

See example below:

DSCR < 1

Principal + Interest = $1,700

Taxes = $350 Insurance = $100 Association Dues = $50

Total PITIA = $2200

Rent = $2000
DSCR = Rent/PITIA = 2000/2200 = 0.91

Since the DSCR is 0.91, we know the expenses are greater than the income of the property.

DSCR >1

Principal + Interest = $1,500

Taxes = $250, Insurance = $100 Association Dues = $25

Total PITIA = $1875Rent = $2300DSCR = Rent/PITIA = 2300/1875 = 1.23

Generally, lenders will let you vest the title in your name or an LLC name.