We have been contacted by a lot of new investors that are looking to either get into real estate investing or already have a small portfolio and are looking to get larger, and one of the more frequently asked questions coming up is: What is the difference between Residential Financing or Commercial Financing?
When looking at financing for a property there are many different people who will finance a property. The main difference between all of these people is the terms which they will give you. When purchasing a residential multi-family property, you can go to a conventional lender and get into a 30 year fixed rate mortgage with 20% down and a low interest rate, but as you start to grow the financing will need to change.
What Are My Options?
If you are growing past the normal 2-4 unit residential multi-family properties, you will now be stepping into the arena of commercial multi-family real estate. Being in commercial multi-family means that you are looking into buildings that are 5 units or more. At this point, with a larger complex, you are looking at different valuation techniques as well as financing. However, your main 3 options will be conventional commercial financing, hard money, or private money.
Conventional Commercial Financing
Most peoples initial question about financing is what is the difference between a typical residential mortgage and commercial financing? The short answer to this would be that the down payment, interest rate, amortization, and loan call time will be different. Generally, you will see the down payment and interest rate increase slightly, and you will see the amortization and loan call decrease slightly.
Hard money is used quite a bit more once you get into larger deals due to the lack of willingness for the banks to finance large sums of money. However, it is a very useful tool if you are trying turn a complex over the next few years. Again, you will see the down payment and interest rate rise from conventional commercial financing, and the amortization and loan call date decrease slightly as well.
Finally, private money is money that is raised from Friends and Family for the most part. This is money that is not given through a bank, but is loaned through different channels. This money can be a very useful way to start real estate investing, and is often how most people will get started. The terms on deals like this will greatly vary depending on where the private money is coming from, and how well the people like you!
If you have any questions about financing properties, feel free to reach out.
Thanks for taking the time to read this article.