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The world of mortgage financing is not as straightforward as it seems. In fact, sometimes you may find yourself pursuing one product while in reality, you may need an entirely different mortgage to get the best deal for yourself.
Notably, many newer investors find themselves surprised that while pursuing a mortgage for a residential investment property their best route forward is a commercial mortgage.
Now, there are a variety of reasons why a commercial mortgage may be the ideal product to pursue when buying an investment property. Let’s take a closer look.
What is a Residential Property?
A residential property is any property built for the sole purpose of housing people. When classifying these properties there are three main types of residential properties that you need to consider – single-family homes, small multifamily properties (2-4 units), and large multifamily properties (5+ units).
While large multifamily properties are always treated as a commercial investment and receive a commercial mortgage, it is possible to obtain a commercial mortgage for all three types of residential properties.
Why Would You Get a Commercial Mortgage For Your Residential Investment?
The main question that you are probably asking is why would you consider a commercial mortgage over a residential one when buying residential real estate. In reality, there are plenty of reasons you may want or need to pursue these financing options instead of a residential mortgage.
High Debt Ratios & Personal Finance Complications
Commercial mortgages rely much less on the finances of the individual investor than residential ones. This mean that if you are in a position where you have high debt ratios or a major complication in your personal finances that has not been entirely sorted out, you may not be able to qualify for a residential mortgage and will need a commercial loan in order to move forward.
Even if you do qualify for a residential mortgage, if your personal finances are too complex you may not be able to qualify for the right amount of money to achieve the LTV (Loan-to-Value) that you want or you may only qualify with private lenders at higher interest rates. In these cases it may be worth seeing if you can get a better deal on the commercial end.
Discover How To Apply For An Investment Property Mortgages With This Step By Step Guide
You Have ‘Hit Your Cap’
Many residential lenders have a limit on the number of mortgages a person can have at one time while still getting approved for more properties. This is meant to prevent people from over-leveraging themselves and their portfolios to avoid large-scale bankruptcies and mitigate risk on the part of the lenders. However, it can be restrictive on your ability to grow your portfolio as an investor.
If you have hit your limit and traditional residential lenders are not able to work with you, commercial mortgages may quickly become your best or only option to receive the finances you have been looking for.
What Do Lenders Look For With a Commercial Mortgage?
When agreeing to finance a commercial mortgage, lenders look at a few key areas in order to ensure that the property is a good fit for the investor and worth the risk involved with financing the purchase.
Income Potential and Fair Market Rent
Commercial lenders typically consider the business side of things first and foremost. That means that their decision to finance a property is largely going to depend on the property’s ability to turn a profit. If the property is generating a healthy cash flow or has the potential to do so, they are going to be more likely do agree to finance the deal.
This is often determined by looking at occupancy rates and the fair market rent for a comparable property. If the property is currently occupied, the lender may be forced to look at the legacy rents and gauge the cash flow based on the current income the property is making.
Sufficient Funds to Maintain the Property
Turnover is a fact of life for rental property investors and lenders are well aware of this fact. However, instead of expecting you to simply deal with it, they want to make sure you are already equipped to do so.
Often this comes in the form of ensuring that you have at least two months worth of expenses for the property set aside so that you can fully turn a unit over and find a new tenant without missing your mortgage payments.
Finally, commercial lenders are still going to take a look at your personal finances regardless of how strong the property appears from a business standpoint. This is because even on a property that has the potential to cash flow $1000 per unit, there is the potential for things to fall through if the investor at the helm is not responsible with money.
Real estate loans are a business transaction and lenders need to be cautious about who they take a risk on. This does not mean your finances need to be flawless, but you need to be able to demonstrate a history of financial responsibility to assure the lender that you are not going to waste their money buying a property you cannot care for.
Get a Commercial Mortgage Today
If you are looking for a commercial mortgage for your residential investments or would like to see what types of commercial properties may be available to you, give us a call to set up a meeting with our dedicated commercial financing team. Our team will gladly help you understand your options and pair you up with the lender who will offer you the best available rate for you every single time.