Conventional Financing Commercial MF

14 Replies

We’re looking to trade up from 1 door to ideally 20 doors and purchase a MF commercial building. On Brandon’s post building $1M net worth, he used 20% for the down payment. I’ve spoken with a commercial lender and commercial Broker, both state on commercial loans you need 30-40% down. Goal is to leverage my appreciating low cap rate market for a high COC/GRM market. What has been your experience and how have you structured the financing on commercial deals?

Also, we’ll be purchasing out state and are currently researching high COC markets. What are potential challenges one might face being an out of state investor and from self managing one door in state to hiring a PM to manage multi?

My experience (East of the Mississippi, at least), is usually in the range of 65-75% LTV. If the property has stabilized occupancy, shows a good history of cash flow / management, you don't have any red flags on your PFS, and there's nothing funky going on with the property, you should be able to get 25% down.

Try shopping around a bit more, I tend to prefer regional banks vs. local banks for this type of property.

@Dulce Beltran I typically see a minimum of 25% down so long as the property is comfortably over the 1.3 DSCR. If there's anything unusual about the property, the required downpayment usually goes up. If you're looking out-of-state and seeking property management, you need to be sure you're interviewing multiple management companies and really fit with the right one. It can cost you a lot of money if you hire the wrong company.

I got a Freddie Mac loan for my commercial property and in the approval process they mentioned they don’t really like distant out-of-state purchases for first deal. I gave them assurances that the property was close enough that we would be making frequent trips.

In my case we bought in Boston and we live near NYC, a driving distance which is not too painful. We also have ties to Boston so I mentioned that we were traveling there frequently even without this property.

Not sure if they’ll raise this with you but be ready with a good response.

@Dulce Beltran My commercial multifamily experience (not in San Diego) is that it's case-by-case.  I'd say that 25% is the prevailing number you should be thinking about but it won't take 5-10 calls to regional banks, credit unions, etc. to figure it out.  But down payment is only one of the factors, I'm sure if you had a net worth of $50MM you could get away with 10% down.  The lender, in the case, probably isn't worried about you paying the mortgage on a $5MM property.  After all, you'll likely be signing a full-recourse loan.  That said, the 30%-40% number could be what it takes to get a property to be cash-flow positive in San Diego.  If that's the case then it comes complete sense why a lender would want to achieve that threshold.  They won't want to lend to a first-time commercial property owner on a property that has a negative cash-flow pro-forma.  I'm rambling now but all of this isn't really material.  All that's material is what the banks say.

@Dulce Beltran , it really depends on the product that you're looking for as well. I would say that the above comments hold true. We see typically 70-80% LTV for MF - higher LTV is held for strong borrowers with pass experience in running investing in such a MF. Also, there are fantastic sources for get MF rates if you find the right lenders. Are you bankable? an SBA product may really help you. Also, what's your PP range?

I received some info recently from a broker on a Freddie Mac product that said they could go as high as 80% LTV with a 1.2 DCR in San Diego. $1-$7.5 million loan amount. Up to 30 year amortization or even interest only, with various terms. Net worth must be at least the loan amount. This was from a CBRE broker.

These aren't "conventional loans".  That's a term for residential mortgages that coform to Fannie & Freddie rules.

@Dulce Beltran , Yes, @Jon Holdman is correct. I'm not sure who you were working with but you can without a doubt get a commercial multifamily loan through the Freddie Mac Small Balance Loan Program with 80% LTV, 30 year amortization if your property is in need of a loan between $1-$7.5mm. Net Worth of the borrower principals combined need to equal the loan amount and the liquidity needs to be equal to or greater than 9 months of debt service.

Also, there is actually a Freddie and Fannie Commercial Conventional program. However, it usually is only for loans $10mm+, however it has very similiar terms as the Freddie SBL program. It does require 1.25 DCR. If you have any questions or would like to exercise your options through these programs please feel free to PM me.

@Andrew Johnson agreed, the 30-40% is definitely for San Diego, and wanted input for outside San Diego. 

@Marty Johnston i'll look into the sba, thank you. 

@Jon Holdman i'll research that tonight, thank you! I wanted to clarify by "conventional" I was referring to traditional lenders vs. creative financing. 

@Tom Keating thank you, the freddie and fannie commercial conventional program wouldn't be needed now, something I'll keep in mind in a few years. 

@Dulce Beltran @Andrew Johnson , The Freddie SBL program is available throughout the US, we have financed a couple deals recently in Lemoore and LA and were able to provide 75%-80% LTV requiring only 20%-25% down. However, if a low cap rate is requiring DCR restraints then you might see the 30%-35% down payments required.

@Dulce Beltran - I wouldn't waste your time looking into SBA. Seems like that commenter missed the fact that you're talking about Multifamily or is confused about the SBA program - it is only for Owner-Occupied Commercial (like a retail store buying out their own building).

Fannie/Freddie could be a fit if you have the right net worth, liquidity, and credit, but as mentioned upline already neither agency likes an out-of-state buyer who doesn't have direct experience/ties to the market they are acquiring in, so likely not an option for commercial loan #1.

@Tim Milazzo I agree, SBA and Fannie/Freddie will not work for our needs, we're still in the process of acquiring the knowledge on commercial loans, etc. Thank you Tim, I appreciate your input!

Can one obtain a commercial loan for a 4plex if purchasing 4 at once?

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here