Compare and Contrast the Residential and Commercial process.
I got into residential investing 2 years ago and am looking to expand my portfolio. From time to time a multi-family property comes up that would require a commercial loan due to the number of units. Additionally there are properties that have both residential units and commercial aspects in the same sale. Both of these options interest me from an investing standpoint, but I just do not know anything about the process.

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So I was curious what the differences and similarities in the process is for getting a 'commercial' property vs a residential property. I say 'commercial', because, again, it may be a residential property with say 5+ units.

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Thank you for all your help in advance. 

[{"id": "cxet03b", "text": "A commercial note is not backed by the quasi-governmental agencies (Fannie, Freddy etc). So the terms are less attractive. Typically you will find: \n\n- Shorter amortization, maybe 20-25 years \n- Shorter term, maybe 3-7 years fixed. At this point the note may come due (balloon) or move to a floating rate. So you bear the interest rate risk \n- Higher origination charge, maybe 1pt up front \n- Minimum debt service coverage ratio, typically 1.2-1.25. This is because commercial notes look more at the income stream of the property than at the borrower's personal income. \n- Higher down payment, maybe 20-30%\n\nOn the positive side, commercial notes are much more flexible. You can roll in rehab funds or structure them in more creative ways. For example I am negotiating one now that has a 6 month interest-only period for rehab followed by an automatic rollover into a miniperm. \n\nLenders are also typically more flexible about the sources of your equity, as long as you have a certain amount of skin in the game (typically 10-15% minimum). ", "replies": [{"id": "cxevddl", "text": "&gt; A commercial note is not backed by the quasi-governmental agencies (Fannie, Freddy etc).\n\nThis is not necessarily true for multifamily properties. Fannie and Freddie together hold about 1/3 of all multifamily mortgage debt.", "replies": [{"id": "cxex2uo", "text": "Good point, I should have said that the majority of 1-4 residential notes are GSE with a few portfolio, the opposite for 5+ residential notes, and all non-residential are portfolio. ", "replies": [], "depth": 3}, {"id": "cxexe4g", "text": "right and FHA taking a small sliver of that for the savvier sponsors.  Other sources of commercial financings include CMBS, Life, Regional/Local Banks, Pref Eq, Mezz, Pension funds, etc etc.  \n\nBiggest difference - deriving value from NOI and not market comps directly (cap rates vs sales comps, etc).  You can have a small commercial project of 5-15 units with no on site management, or 100+ unit project with onsite management, maintenance staff (probably a third party management company), fair housing regulations/ADA accesibility stuff, etc.  \n\nCommercial Properties you'll need liquidity and net worth, esp if required escrows for reserves for replacements, lease-up/stabilization reserves (if affordable, or leasing up, etc), initial deposits (to pre-fund your reserves for replacement account), etc.  Depends on the financing but you may be required to fix life/safety critical items prior to closing or set up another escrow for that and repairs need be made within 12 months of closing, etc. \n\nLets get down to brass tacks here.  You're probably at that fine line where you're buying properties with more units (4 or 5) and its teetering on the commercial side of requirements which would be more cost prohibitive at lower units but reasonable on a bigger complex.  Theres going be a point where you'll need to partner up or get with someone to buy a bigger complex to enjoy economies of scales, leverage, etc.  \n\n&gt; Additionally there are properties that have both residential units and commercial aspects in the same sale. \n\nwut? \n", "replies": [{"id": "cxf0btn", "text": "&gt;Additionally there are properties that have both residential units and commercial aspects in the same sale.\n&gt;&gt;wut?\n\nI am saying that there are properties that have commercial on the first floor and the next two floors are residential. Looking at that now I could have phrased it better.\n\n&amp;nbsp;\n\n&gt;Lets get...leverage, etc.\n\n So let me ask a more pointed question then. If I am looking at a 3 building, 11 unit complex on the market for 1.2, how does more units make it more reasonable. Due to the increased NOI? Other factors? Would the bank be looking for $240-360k down?\n\n&amp;nbsp;\n\nI apologize if these are basic questions, but like I said, I am well versed in residential transactions, but new to commercial and know very little. \n\n&amp;nbsp;\n\nI can answer more specifics here or in messages. Thank you all thus far. \n\n", "replies": [{"id": "cxf3imv", "text": "&gt; I am saying that there are properties that have commercial on the first floor and the next two floors are residential. \n\nI've always called them Mixed Use, Multi-Purpose, or just a Corner store.\n\n&gt; Would the bank be looking for $240-360k down?\n\nMy banker buddies have said nothing less the 20-25%.\n\n\nI'm a residential agent as well but I want to get into the commercial side and have started looking and asking around to learn.", "replies": [{"id": "cxfbmgs", "text": "i'm a CRE lender and confirm the above posted. i won't look at anything at more than 75% LTV, and want to see at minimum 1.25x DSCR w/an unlimited guaranty or 1.30x DSCR with limited guaranty (carve-outs).", "replies": [{"id": "cxfez27", "text": "Ok. So for someone new to CRE, can you put that in layman's terms?\n", "replies": [{"id": "cxguz74", "text": "LTV = Loan To Value. When he says 75% LTV, he means that the most he will lend is 75 cents for every dollar of estimated value of the property. For example, a property with an estimated value of $1,000,000 will at most get a loan of $750,000. Estimated value is usually one that is supported with an appraisal, which is a formal opinion by an appraiser. Appraisals for commercial properties are usually more expensive than residential and can cost several thousand dollars.  \n  \n\n\nDSCR = Debt Service Coverage. The DSCR represents the relationship between the net operating income of the property {Rental Income less operating expenses} and the mortgage payments. If your property has $14,000 a year in net operating income and the sum of the annual mortgage payments is $10,000. Then the DSCR is 1.40X.  \n  \n\n\nA limited guaranty is something that you sometimes see in commercial real estate financing. Normally, you do not want to take ownership of a commercial property in your own name. If something happens in the property, you can be held liable if you owned the property under your name directly. Therefore, investors usually create separate legal entities to hold property. Lenders will usually want an unlimited guarantee from the individual, but you as an investor probably want to give no guarantee or a limited one. That way if something happens and the property does not have the capacity to pay the loan anymore, the lender can not come after you personally.", "replies": [], "depth": 8}], "depth": 7}, {"id": "cxlqycu", "text": "^ even on mixed use? ", "replies": [], "depth": 7}], "depth": 6}], "depth": 5}, {"id": "cxfdwok", "text": "More units makes it more reasonable because you are amortizing your expenses over more units. When it's time to replace the roof, would you rather have 3-4 income producing units absorb that cost, or 100? Same goes with HVAC, onsite management, taxes, etc.", "replies": [{"id": "cxfezav", "text": "But does it necessarily make it easier to get into in the first place?", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "cxfbipv", "text": "Not to mention a lot of SBA backed paper floating around.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "cxlr0i6", "text": "Nobody has mentioned that when you get a commercial loan vs a residential loan, you are generally not protected by the various consumer protection laws out there. It's a different ballgame in terms of CYA when you're signing a Note. Do a lot of homework to get comfortable. ", "replies": [], "depth": 1}]