What you need to know about purchasing commercial properties
When buying a multi-family property, several key considerations will impact your mortgage options and long-term financial success.
There are two ways to qualify for a mortgage with a multi-family rental property.
Through traditional (residential) mortgages: This is most often the case used for units 4 or less, although there are specialty programs that will allow financing up to 8 units by this method. This allows us to get the lowest rates and put as little as 20% down payment being required. For this solution, they look at your income as well as the rental income to determine the qualification
2. Through a commercial mortgage: This is often the case for 5 or more units. This way the income of the property is used to determine the amount of down payment required. Most lenders will want to see a net worth statement as well as the building’s financials. There are programs available that you can put as little as 5% down and a 50-year amortization although in most cases considerable down payment is required upfront and then these programs are used to refinance them once the property is performing well enough to qualify for these programs.
Residential Multi-Family
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Residential multi-family properties are typically financed similarly to a single-family home, with traditional mortgage options.
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The down payment requirements for multi-family properties are typically higher than for single-family homes, especially if you do not plan to live in one of the units.
Owner-occupied properties: If you’re living in one of the units, you may be able to secure a mortgage with as little as 5% down.
Investment properties: If the property is purely for investment, lenders usually require a down payment of at least 20% and sometimes more, depending on a variety of factors (location, finances, number of units).
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One of the benefits of a multi-family property is that lenders will typically consider the rental income from the property when calculating your ability to afford the mortgage. This can boost your borrowing power and make it easier to qualify for a larger loan.
However, it is important to know which how lender calculate their rental income as it can greatly effect your ability to qualify.
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When assessing your mortgage application for a multi-family property, lenders will pay close attention to your Gross Debt Service (GDS) and Total Debt Service (TDS) ratios. These ratios compare your income (including rental income) to your debts and mortgage payments. Your ability to comfortably manage both your personal financial obligations and the expenses related to the property will be key in securing financing.
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Interest rates on multi-family properties can vary depending on whether it’s owner-occupied or an investment property. In general, lenders may offer slightly higher interest rates for investment properties than what they offer for owner occupied although this is not always the case.
Terms are usually similar to traditional mortgage terms for a single-family "Traditional" home.
Please Note: There are specialty programs available with certain lenders that will allow you to consider a property with 5 to 8 units to be classified as Residential. Let’s chat about whether your property would fall within these lender guidelines.
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Commercial multi-family properties (low-rise apartment buildings, high-rise apartment buildings) may require commercial financing, and lenders only care about how the properties cash flow as well as proof that you have enough experience with these types of properties.
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For commercial multi-family properties, lenders usually require a down payment of at least 25% or more, depending on the number of units and the buildings financial situation. As most people want to purchase "underperforming" units down payment can be significantly more.
There are programs available to put as little as 5% down, although this is usually done after the property is brought to peak income performance. -
Lenders will scrutinize the condition of the property and comparing the value of the property to other similar properties. It is not uncommon for conditions of financing on these types of properties to be between 30 and 45 days.
Appraisal: A lender will typically require a professional appraisal to assess the value of the property and ensure it matches the purchase price. These can be significantly more expensive than residential appraisals and can be over 100 pages long.
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Commercial interest rates vary depending on area, total loan amount, property condition and whether you are using CMHC programs.
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Lenders will also consider the local market conditions, including rental demand and vacancy rates in the area where the property is located. In high-demand areas with low vacancy rates, lenders see less risk, which could result in more favorable valuations. Conversely, if the property is in an area with higher vacancy rates or fluctuating rental demand, lenders may require larger down payments.
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Managing a multi-family property can be more complex than a single-family home, especially if you don’t live on-site. Lenders may ask about your experience with property management, or if you plan to hire a professional property management company. Demonstrating that the property will be well-maintained and tenants will be properly managed can make your mortgage application more appealing.
