Licensed Real Estate Brokers | Property Managers
Lending on Properties with Four or Fewer Living Units
In general when you start talking about getting a mortgage for investment property you enter a distinctly different environment than residential lending. A property up to and including 4 units, even a single condo or home for investment purposes, you jump your down payment up to 25%, minimum 20%. Your credit score is incredibly important. Banks have become gun-shy of investment lending so it takes a pro-grade lender and we know where to send you. Most loans for properties described above are still 30 years but the interest rate is going to be ¼ to 1/2% higher than a conventional home loan.
When you move past 4-unit buildings and get into apartment buildings, commercial space, malls and so forth you truly enter the world of commercial lending. The process is similar to residential lending but the bank is going to be a lot more involved in evaluating the property and looking into your track record as a landlord. They are much more relationship-based. Down payments are generally in the 30% range and terms get shorter. Most commercial loans are 20-year amortizations but many will include a balloon payment on the end. Your payments in a situation like this are similar to a 30-year loan but you will either need to prepare to pay the balloon at the completion of the loan or refinance the balance.
This is the point at which we merge into the world of seller financing. In many cases a seller may be willing, or even interested, in lending you the funds him/herself. In essence the down payment, which can vary widely in some cases to zero, goes directly to the seller directly. Then you are granted a contract for deed or a similar instrument.
The contract will specify the term of the loan, as short as a couple years to 30 or more as well as the interest rate and the payment amount. The interest rate will be higher than prevailing commercial rates. The real benefit of the contract for deed is that you only have to qualify with the seller and often qualifying guidelines are relaxed because the seller wants to sell the building.
Five and seven-year contracts with balloons are very common. The balloon may be refinanced if your behavior has been good. One thing to keep in mind is that the seller will pay taxes on the money as they receive it, so a contract for deed allows the seller to pay taxes incrementally avoiding large capital gains tax obligations. One downside to a contract for deed is that f you fail to make as little as one payment the seller (or contract holder at this point) can cancel the contract and simply take the building back. There is no provision for a foreclosure. The cancellation can take as little as 60 days and you lose all of the money you have put in thus far, so you need to be very cautious about entering such a contract.
We have experience with all of three forms of lending and have excellent resources should you seek funding for your dreams.