Commercial vs Conventional Loan

12 Replies

My husband and I are getting ready to purchase a SF rental property.   My accountant referred us to a commercial loan officer at a local bank, because that's how he purchases his rental properties.  I haven't heard Brandon mention using commercial loans for "non-commercial" property. We would appreciate any thoughts, educated opinions, or ideas on this subject.

@Paula Phelps . What do you mean by a non-commercial property ? The definition of a commercial property I have found out means different things to different people in real estate. A commercial property is a non-owner occupied property whither it's a condo or a shopping mall. Some commercial properties are fix and flip deals and some are churches, etc... The key is non-owner occupied vs owner occupied. If it's owner occupied it's not a commercial property. Now they are some exceptions but hopefully remembering owner occupied vs non-owner occupied will help you. Much success !

Thanks, David Wright, for your response. As stated, my husband and I are ready to purchase a SF rental property. We will not be living there. This is an investment property that could be considered commercial, since it is an investment property. However, the information I am attempting to gather is not whether it's a commercial or non-commercial property. I am looking for information about the type of loan we should try to secure in order to purchase the property. 

The main reason to get a commercial loan would be if you are not bankable for a conventional loan.

If you have good credit and good income you should be seeking a Fannie/Freddie conventional loan.

I would not pursue a commercial loan unless you have a lot properties (a strong portfolio). Conventional financing will have better rates and allow you to lock that rate for 15 or 30 years. Commercial loans also have balloon payments. I would speak with a lender you already bank with. They want to keep customers in house and will offer great interest rates if you have good credit. 

What is your exit strategy with the property? 

How long do you plan on holding onto the property? If this is a long-term buy-and-hold, I would secure a residential loan, because you can get a fixed interest rate, 30 year loan. If you get a commercial loan, it will expire after 5 to 10 years, forcing you to refinance or sell. 

Originally posted by @Paula Phelps :

My husband and I are getting ready to purchase a SF rental property.   My accountant referred us to a commercial loan officer at a local bank, because that's how he purchases his rental properties.  I haven't heard Brandon mention using commercial loans for "non-commercial" property. We would appreciate any thoughts, educated opinions, or ideas on this subject.

 Paula

We always counsel our clients and potential clients to exhaust their conventional financing options first and then pursue commercial financing.  There are a lot of reasons why people don't qualify for conventional financing, but that will always (it's funny I'm using an absolute because I rarely do that) be cheaper when talking rate and terms.  Once you've reached your Fannie Mae limit, you can get a non-bank commercial type loan that wraps all of your properties up into one loan and qualify for conventional financing all over again.

Best of luck

Stephanie

Hi Paula,

Unless you are unable to secure a residential loan (property doesn't qualify, you don't qualify, etc.), I would forgo the commercial loan. Commercial loans usually have an adjustable interest rates and have shorter long-terms and amortization schedules, meaning you will be forced to refinance or sell in 5 to 10 years and have a higher mortgage payment. Whereas with the residential loan, you get a fixed interest rate on a 30 year mortgage amortized over 30 years.

The only advantage I see for getting a commercial loan is when you've maxed out the number of residential loans.