When to Pivot from using HM & DSCR loans to Commercial Financing through Local Banks

Question

I'm curious what other folks experiences and opinions are with using commercial banks to fund their real estate (fix n flip loans/longer term financing/LOC).

I've done 6 deals so far, have 5 units in Cleveland. Having to close twice on a property with title and a lender (purchase + refinance) really eats into the bottom line.

I make decent W2 income, and newer to real estate, but I do think this is a great option. I just can't find much info out on the internet regarding this topic. I know I can reach out to these banks, but I'm also curious what other investors think and have experienced.

Arman Ahmed · Answer

@Brett Graver

A lot of investors shift to local commercial banks once they’ve built a small track record because the rates and fee structure can be much better than HM or DSCR options. The big advantages are single-close products, portfolio flexibility, and easier access to LOCs as your units grow. The trade-off is stricter underwriting and relationship-building, but once a bank knows your deal flow, they tend to move quickly and offer stronger long-term terms. Many investors I work with use a mix—HM for speed when a deal needs to close immediately, then commercial financing for anything they plan to hold. It really comes down to how predictable your pipeline is and whether the savings outweigh the occasional need for fast capital.

Patrick Roberts · Answer

The short answer on when to use bank loans is whenever the bank will give you one.

Bank construction loans and lines of credit will work similarly to hard money loans in that any loan will require a new (2nd) closing any time there is a refinance. The existing mortgage/DoT has to be released, and a new note and mortgage/DoT have to be signed and recorded. Title policies typically have to be updated as well. Attorneys or title companies charges fees to complete these services.

The only way to avoid two closings (and therefore two title/attorney fees) is to see if a bank will give you some kind of construction to permanent loan. Even then, there will likely be some kind of closing/costs when the loan docs are modded/updated after construction completion.

Bank loans for fix and flip tend to be marginally cheaper, but they are typically slower to close/fund and harder to get. Really, the only place youre going to save on something like this is on the points/orig fees, maybe on the rate, and maybe on a portion of the closing costs.

Another caveat - DSCR loans are typically going to be a better deal for long term financing than what most banks offer. Usually, bank portfolio loans are going to have amortizations of 25 yrs or less and maturities of 5-7 years, but have comparable interest rates.

Brett Graver · Answer

Thanks for your input Erik. I’m more so exploring every way of financing I can that can save thousands of dollars per deal. If I’m paying 11% and 2 points on a purchase and then another 2 points plus all the title fees on a refinance, and there is an option out there to eliminate the fees on the backend, that is something worth exploring.

Even if there are downsides like it’s more of a colonoscopy loan process, slower approvals etc. Just trying to keep my options open.

I’d consider an extra 5-10k having a strong effect on my bottom line.

Erik Estrada · Answer

If you are using the same lender on both the purchase and refi, they should be able to decrease their points to 1%, same goes for title companies. Additionally, on a refinance you can increase the rate to provide a lender credit to cover most of your closing costs.

Lastly, you should explore if you can finance a seller credit, by coming in with a higher price. If the real issue is fees, pricing in a credit and coming in with a lower out of pocket expense may make sense.

11% is pretty high on a bridge. You should be at 9.99-10.375% if you shop it.

But either way, you'll be paying for it somehow. Either through a higher rate or higher price. I think it may make way more sense to revisit rehab budgets, as that tends to be the highest cost.

The slower approval/process might actually cost you deals. I am not sure how you source your deals, but if you are buying open market, and you are using a lender that is known for slow closings, the likely hood of your offer getting accepted will be low. If you are buying through wholesalers or off market, it might not matter as much.

This is a relationship business as well. I know in my area, it is a very tight knit real estate community. Word gets around quick if a lender is bad..

Joshua Janus · Answer

Hey Brett if you have a bunch of deals going on at once you can do a commercial portfolio loan all together which would be less closing costs compared to individual refinances.

Erik Estrada · Answer

There's no way loan fees eat that much of the bottom line.. How much are the lenders you are working with charging you?

Are the deals very tight on the ARV? Can the rehab costs be reduced?

What I typically see on the lending side, are clients buying too high in competitive markets, putting too much in rehab or having high contractor bids based on comps in the area, over leveraging financing, and the ARV coming in low since they were already tight to begin with.

Local banks and direct lenders will definitely have better fees/pricing, if you establish a banking relationship, deposit money, or do serious volume.

I think you might benefit by using more of your own cash and LESS financing, if your goal is to minimize the cost of borrowing. There will always be fees wherever you go..

You can also look at taking on a line of credit, at a reasonable interest rate, and low fee with a bank and then refinance with the same bank.

But I think this issue is less to do with the financing cost, and more to do with the deal itself.

When to Pivot from using HM & DSCR loans to Commercial Financing through Local Banks

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