Should I use a commercial loan for my first property?

Question

Hey y'all! First time poster (and buyer), scoured the forums but couldn't quite find someone with my situation I could refer to. Apologies in advance if this is a double post or in the wrong category. I came across a fantastic opportunity, but was bummed to find out that the property was zoned commercial and therefore not traditionally financeable. This would be my first home, do I move on to a more basic first place or do I stick it out and fight for this one? The location is fantastic, the numbers look good, is it worth going down the commercial road to finance my first property?

Me: First time home buyer, goal of owning a minimum of 5 - 10 income properties to achieve my financial goals. I have 5+ years managing multiple Airbnb locations in Brooklyn and feel confident I can manage a property I own.

Current Financials: Between my business partner and I, we're currently pre-approved for a $280k trad. mortgage. Both have high credit scores

Property Goals: Positively contribute to the growth and recovery of SE Michigan

The Property:

Type: Quadplex with Attached Commercial unit

Location: SE Michigan, 20 min commute from either Detroit or Ann Arbor

Asking Price: $269,000

Repairs: $20K max (tear down of a barn that needs to happen within the next 5 years and maybe a kitchen rebuild)

Approach: House Hack for 1-2 yrs

Property Income: $517/mo. after expenses while house hacking, $1,017/mo. after I leave

Cash on Cash ROI: 15.9%

Numbers I used to calculate this: ARV $269k (to be super conservative), $3k closing cost, $20k repair, 20% down with a 4.8%APR amortized over 30yr., Taxes $7779/yr. (actual), Rent $3500/mo (after I leave, actual and by sq. ft. comps for rentals in this area), $200/mo other monthly rent (garage space rental actual), Vacancy 3%, R&M 9%, Cap Ex 3%, Management 10%, Annual Income Growth 2%, Annual PV Growth 2% (super conservative, this area is currently expected to be 5%-8% in the next 5 years), Annual Expense growth 2%, Sales Expense 9%)

Any thoughts appreciated. Even if it's about the numbers I used to calculate this deal. Thank you all!

Mark Bookhagen · Answer

Yes 20 is usually the max term a commerical lender will do. Another note on that: the interest rate will reset every 5 year and there are prepayment penalaties that decrease the closer you get to each reset period. The further you are away from the proceeding reset time, the more the pre-payment penalty is. So year 1, you have a high pre-payment penalty, year 5 is low, then year 6 is high, and so on.

Tom S. · Answer

@Matt Hurley Most of my loans are commercial and yes, they are all 20 year amort. Also my rate is more 6% ish range now, although I don't owner occupy. 25% down for the standard, although again, may be lower for owner occupied.

Just call around to local banks / credit unions and ask for the commercial lending department. Note even though it's commercial, typically still will require a personal guarantee, and therefore your personal financials will factor in.

Definitely think it's doable though - good luck!

- Tom

Mark Bookhagen · Answer

With a commercial mort, you'll need to re-calc your amort with 20-years (not 30). Other than that, go for it! One thing you'll want to check is if you're planning on selling within 5 years and want to use the the Home Sale Tax Exclusion - I'm not sure if it applies to commercial property.

Matt Hurley · Answer

Appreciate the info guys, thanks!

Matt Hurley · Answer

Thanks for the response Mark! Why 20 years, is that more common with a commercial lender? I also have only 20% down and from the Financiers on this site, seems like most lenders offer only 60-75% TLV. Do you have personal experience with commercial loans? Any other specifics I should be aware of before making some phone calls?

I was not aware of the Home Sales Tax Exclusion, looks like it's dependent on the percentage of the house that's used commercially and whether the office is in or outside the main residence (outside for this property). But I'll look more into it, thanks for the info!

Should I use a commercial loan for my first property?

Should I use a commercial loan for my first property?

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