Demystifying Why Investors Switch From Residential To Commercial Properties (Part 1)

  1. Single Family Residences (SFRs), duplexes, triplexes and quads are maintenance, management and hassle intensive per unit of profit.
  2. SFRs and residential multifamily (less than 5 units) rarely “pencil out.”  They sometimes make fine “buy and hold” properties, but rarely cash flow well. Today’s sophisticated investors know that if they combine a number of small investment properties they can afford a commercial multifamily asset.  (They may even be able to take advantage of Cost Segmentation for accelerated depreciation…impossible for smaller investments.)
  3. Of course, as we trade up to more and more units at a property, we get to the point where we can pay someone else to manage the property.  Then our role transitions to “managing the manager.”
  4. Explanatory note: While by definition we typically say 5 units and up are Commercial Multifamily, in practice 8 to 10 units is when the first tier of economies of scale appears.
  5. In the past, up to 10 properties could be owned by an investor, including their primary residence…but about 10 months ago Freddie Mac stopped loaning to borrowers with more than 4 residential loans.  Fannie Mae has followed suit.  There is no legal prohibition against owning more properties…but borrowers no longer qualify for many loans if they exceed the new number.  (I do work with one lender who will still loan on up to 10 properties…call me at 503.577.1034 for information.)
  6. In order to move up to larger opportunities, some investors will refinance multiple houses and residential multifamily assets.  Lenders may approve 3% down loans on owner/occupied homes, and be comfortable writing 20% down for investments, but on “cash out” loans many require at least 30% down (70% LTV).

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