Commercial vs Residential Financing

Commercial vs Residential Financing

Generally speaking, it is more difficult to finance a multi-family property than a single-family home, assuming you are using traditional financing (i.e.- a bank or similar commercial lending institution).  The main reason for this is due to the relative marketability of a multi-family property, compared to a single-family home.  There is a bigger market for single-family homes because both investors and owner-occupants traditionally purchase them, as opposed to multi-family properties which are typically only purchased by investors.  This marketability variance against multi-family properties increases the banks risk of recovering their money within a reasonable time frame in the case of default and foreclosure.

With all that said, given today’s historically low interest rates it is often a wise financial move to finance multi-family buildings rather than hold them free-and-clear.  So, how do you get a multi-family mortgage?

Properties consisting of five or more units require commercial loans for multifamily purposes.   Unlike single family homes, and depending on the lender, the general rule of thumb is that there must be an 80% to 85% loan to value ratio (LTV).  That means that you can generally only finance 80% to 85% of the purchase price of a multi-family property whereas some single family homes can be financed with much smaller down payments.

Financing options on multi-family properties run the gamut from fixed rate, standard adjustable rate, capped adjustable rate  and fixed-to-float mortgages.  Interest rates are generally 0.5% to 1% higher than loans on similarly priced single-family homes.

Just like a single-family mortgage, the credit worthiness of the borrower is a prime consideration for multi-family property financing, but not the only one.  For these types of loans, the lender will take into account the Debt Service Coverage Ratio (DSCR).  Loosely, the DSCR is calculated by the Net Operating Income divided by the Total Debt Service (e.g., annual income / annual payments).  Most lenders are looking for a ratio of 1.2% or greater, which basically means that the property is generating more than enough income to pay its debt.

Commercial vs Residential Financing

Commercial vs Residential Financing

The major underwriters (Fannie Mae and Ginnie Mae) require the properties to be in good repair.  Anything needing major renovations or repairs is unlikely to be financed.  Obvious cosmetic improvements shouldn’t hold up a loan, but major rehab isn’t usually available.

Lastly, and this is a generality, but I’m a fan of using local banks for commercial loans (or any sort of ‘out of the ordinary’ loan for that matter).  I feel like the larger institutions are less willing to work with whatever unique situations you may have (and there is always SOMETHING unique about your lending situation) and are more bound by their bureaucracies and self-imposed rules than smaller banks.

I hope this crash-course in multi-family property lending has been helpful.  Please post questions in the comment section! Central Florida Property Management is always ready to help you with any of your financing questions.

Leave A Comment