Residential Vs. Commercial

6 Replies

There are many multi-units available in St. Louis.  The brick buildings are up to 80 years.  My criteria includes updated windows and kitchens; new roof; and updated plumbing and electric panels.  Thanks to many re-hab investors, there are quite a few opportunities. So why not go bigger?  Rather than a gutted, rehabbed duplex or 4-plex, the gutted and rehabbed 6 unit building is very attractive. All three fit my criteria.  All three pass my 1% rule.  But the 6 unit building falls into the commercial loan department.  Why does the commercial loan get a bad wrap? Bank #1 and #2 have similar basic terms, 20% down, 3 years fixed at 5%, with an adjustment at the 3 year mark to 'current market interest rate.' I haven't rcvd. a reply yet, as to how they define 'current market'.  But on paper, there is a agreeable cash flow, double the duplex.  Why isn't there a long line of interested buyers?

Kathy H., Newbie

@Kathy Henley After doing some research on commercial and residential loans, the options are more favorable for a residential loan in terms of the cost of financing.  You're comparing the same loan programs between residential and commercial, and they're pretty close.  However, if you want a fixed 30 year loan to maximize your return on investment you can only use residential loans because commercial loans max out at 20 years for the most part.

When you go bigger (more than 4 units) you have no choice but to use a commercial loan, which limits your financing options.  If you're just starting out, this could put a limitation on your strategy options.  If you have a good track record with a lender, you can probably find favorable terms because you've proven you know what you're doing.

I suppose that is why some investors stay with the residential programs in the beginning and work their way up to larger commercial or portfolio financing.

Ultimately, if you find something where the numbers work for you, and you're comfortable with them it's not going to matter.  Just be sure to do your due diligence and build the financing variables into your projections and you should be fine.

I'm sure others have more insightful opinions on this topic, but just my 2 cents ;-)

most people are scared to go big.

I haven't gone commercial because the numbers haven't been better in my market than single family. Also note that 6 unit commercial is going to be a hard reseller. Commercial loan are harder to get. Don't forget that 30 year mortgages are very low. So over 3 years your better off with one loan than 6 and the refinance costs that come with it. I have looked into getting commercial loans and they really aren't as easy as you make it seem.

I have been in the position for some time where I am looking to move to bigger properties & use commercial lending.  Each property that I purchase using residential lending requires 25-30% down payment, which is high, but in line with what commercial lenders ask for.  From my discussions with commercial lenders here is what I have found out:

LTV: They require 70-80%, however, this is usually based on appraisal using CAP rate, NOI & gross rent multipliers. They seem to be more flexible with the down payments & require it based on the appraised value not on the purchase price, unlike residential lenders.

As far as the down payment goes, the commercial lenders don't seem to mind as much where the funds come from, to a certain extent. I had a commercial mortgage broker tell me that I can use my business LOC (as long as I season the funds), personal/business cash, seller carry back, gift funds & crowdsourcing, or a combination of those for the down payments.

The problem that I have run into is that a lot of lenders have minimum loan amounts, anywhere between $300k to $1mil.  So the problem is fund raising the down payment & finding the right property.  Speaking of which, each lender has their own standards for class of property.  Generally, it take just as much work for a lender to process a loan on a $250k 5 plex as it would for a $2.5mil 80 unit property, which is why the lean towards the higher minimums.

DCR: Debt Coverage Ratio. Obviously you want your property to cover the mortgage and then some. Most lenders have told me that they want 1.5-2.2. Which is fine with me, since a 2.2 would mean that I am cash flowing pretty well.

The down sides, as I see it are that a lot of lenders will give you 20-30 years but require either a balloon, or re-fi every 3-5 years.

Resale: There is a limited amount of buyers, which hinders your ability to easily resell a property.

Hope my ramblings help.  I have been snooping around looking for a larger multi-family property with a loan to go with it.

The reason people aren't lined up to buy these is because you're a California investor and thus much smarter than the local St. Louis investors.  You have special insight that the local rubes just don't have.  Especially if you're looking for 1% deals in St. Louis.

@Bob Hines mind to explain a bit more in regards, "You have special insight that the local rubes just don't have."

I'm a St. Louis guy trying to figure out which niche I'd like to concentrate on and any insight would be appreciated. Thanks!

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