Commercial Loans for under 10 units

1 Reply

Sloane Kraftsow

Lender · New York, NY · Member since 2023 · 749 posts · 510 votes

Hi Welsh! I believe this article is exactly what you are looking for: https://www.biggerpockets.com/...

I would love to connect and hear what you think about it!

1 Reply

Adam Bartling

Lender · Rosenberg, TX · Member since 2022 · 287 posts · 130 votes

@Welsh Tucker Today I was quoting clients at High 7s to mid 8s depending on FICO & LTV. We have 3 lenders that are very lean and then everyone else is .5-1pt higher.

Alecia LovelessPro Member

Member since 2019 · 3k+ posts · 2k+ votes

@Welsh Tucker The bank I’ve been using for my small multis is a small local bank. I just went with them on my first 5-10 unit commercial property.

The loan was 25% down, 25 year amortization, 7% interest rate, rate readjusting every 5 years. But do not have to refinance unless we want to.

I looked at another small local bank and they have less branch offices than the first and their loan was 25% down, 20 year amortization, 8.25% interest rate, refinance after 5 years.

So yes you can find a bank that will do longer term loans. No it was not a DSCR loan, and the rate was locked 2.5 weeks ago so fairly recently.

The difference in the payments between the two would have been a loss of about $850 from our cash flow if we had gone with the second loan or roughly $48,000 over the 5 year period. So it pays to shop around.

1 Reply

Stacy RaskinBusiness Member

Lender · Member since 2022 · 1k+ posts · 531 votes

[email protected]818-770-0340

@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.

Bright Skyline517 Reviews

2 Reply

Dennis Muno

Lender · Denton, TX · Member since 2023 · 349 posts · 80 votes

Quote from @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.

Loans like that are possible. However, keep in mind pricing from every lender is different so you'll have to compare them to get the pricing that will be best for you

Erik EstradaBusiness Member

Lender · Los Angeles, CA · Member since 2022 · 7k+ posts · 1k+ votes

[email protected]818-269-7983

Quote from @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.

DSCRs can go up to 10 units. No DTI required to qualify. Best of all is the loan is 30 years fixed.

LuxePrivate Investments LLC 572 Reviews

Stephanie MedellinBusiness Member

Mortgage Broker · CA · Member since 2014 · 1k+ posts · 644 votes

DSCR loans have come out in the past few years for small commercial rental properties (5-8 units, mixed use OK), and they offer 30 year fixed rate loans. Rates will vary based on LTV, credit score, etc., but low to mid-8's is a reasonable estimate.

[email protected]

Stephanie Medellin, Loan Factory58 Reviews

Welsh Tucker

OP

Member since 2022 · 9 posts · 0 votes

Quote from @Stephanie Medellin:

DSCR loans have come out in the past few years for small commercial rental properties (5-8 units, mixed use OK), and they offer 30 year fixed rate loans. Rates will vary based on LTV, credit score, etc., but low to mid-8's is a reasonable estimate.

Hi Stephanie - thanks for the reply. I keep hearing about DSCR but have heard they have periods of interest only or different terms. Is the DSCR for the 5-8 units typically comparable with a traditional 30 year fixed residential loan? What's the difference?

Stephanie MedellinBusiness Member

Mortgage Broker · CA · Member since 2014 · 1k+ posts · 644 votes

Yes, some do have an interest only option, which can help with cash flow the first 10 years. If you go with an I/O option, when the interest only period is over, the loan will be amortized over the remaining term. The interest rate would still be fixed.

Really the difference is in how you qualify. Commercial lenders often want to look at your net worth and other finances, but DSCR loans focus only on the rental income of the property and your down payment / credit score / reserves. Typically they do want you to own your primary residence, and may also want to see some recent landlord experience.

[email protected]

Stephanie Medellin, Loan Factory58 Reviews

Welsh Tucker

OP

Member since 2022 · 9 posts · 0 votes

Quote from @Stephanie Medellin:

Yes, some do have an interest only option, which can help with cash flow the first 10 years. If you go with an I/O option, when the interest only period is over, the loan will be amortized over the remaining term. The interest rate would still be fixed.

Really the difference is in how you qualify. Commercial lenders often want to look at your net worth and other finances, but DSCR loans focus only on the rental income of the property and your down payment / credit score / reserves. Typically they do want you to own your primary residence, and may also want to see some recent landlord experience.

That's starting to make more sense. So I have recent landlord experience with single family (which we own) but I rent my current residence and sold a primary residence a little over a year ago. So does me renting my primary impact the ability to qualify for DSCR? Credit and income will not be an issue either as my wife and I are both in the upper 700s.

Stephanie MedellinBusiness Member

Mortgage Broker · CA · Member since 2014 · 1k+ posts · 644 votes

I've seen at least one or two programs that allow you to qualify with a 12 month rental history. It has to make sense. If the investment property is further away from your current home and job and you intend to stay where you are, underwriting may be ok with it. The concern for most lenders is that you'll move into the property and then it becomes a "consumer" loan, rather than a "business" or investment loan. You will typically need to sign an affidavit at closing that the loan is not being used to buy a property that you or your family members will occupy at any point the loan is outstanding.

[email protected]

Stephanie Medellin, Loan Factory58 Reviews

Welsh Tucker

OP

Member since 2022 · 9 posts · 0 votes

Quote from @Stephanie Medellin:

I've seen at least one or two programs that allow you to qualify with a 12 month rental history. It has to make sense. If the investment property is further away from your current home and job and you intend to stay where you are, underwriting may be ok with it. The concern for most lenders is that you'll move into the property and then it becomes a "consumer" loan, rather than a "business" or investment loan. You will typically need to sign an affidavit at closing that the loan is not being used to buy a property that you or your family members will occupy at any point the loan is outstanding.

The property is about 2 hours from our current place of residence. We intend to purchase the property through LLC if possible too, not sure if that would help.

Erik EstradaBusiness Member

Lender · Los Angeles, CA · Member since 2022 · 7k+ posts · 1k+ votes

[email protected]818-269-7983

Quote from @Welsh Tucker:

Quote from @Stephanie Medellin:

I've seen at least one or two programs that allow you to qualify with a 12 month rental history. It has to make sense. If the investment property is further away from your current home and job and you intend to stay where you are, underwriting may be ok with it. The concern for most lenders is that you'll move into the property and then it becomes a "consumer" loan, rather than a "business" or investment loan. You will typically need to sign an affidavit at closing that the loan is not being used to buy a property that you or your family members will occupy at any point the loan is outstanding.

The property is about 2 hours from our current place of residence. We intend to purchase the property through LLC if possible too, not sure if that would help.

Most DSCR lenders require that you close in an LLC.

LuxePrivate Investments LLC 572 Reviews