Fourplex on residential terms or a six unit on commercial, roughly the same cash in

Question

Two things I've been looking at side by side, both about 40 minutes from me.

One is a fourplex around 540k, four two beds, in place rents 1,250 each. It would be a residential loan, which as I understand it means a longer fixed period and a smaller down payment, and I'd be underwritten partly on my own income. Terms vary by lender and I'd need mine in writing before I trusted any of that.

The other is a six unit at 690k, one bed units, in place rents 850 each. That's a commercial loan by unit count. What I'm told is a higher rate, a shorter term with a balloon, amortization stretched to make the payment work, and the underwriting sits on the building's income rather than mine.

Case for the fourplex: cheaper debt, no balloon date to refinance into whatever rates exist that year, and the option to live in a unit later. Case for the six unit: 30 percent more doors for 28 percent more money, price per unit of 115k against 135k, and one more tenant means one vacancy costs 17 percent of gross instead of 25 percent. The commercial lender also does not care much about my W2, which matters if I change jobs.

People here talk about the residential financing edge on 2-4 units like it settles the argument, and then other people say the real money starts at five units and the debt is just a cost of doing business. I can't tell which of those is a preference and which is arithmetic.

What would decide it for you, and what number would you want to see before you'd cross the four unit line?

tylerbrooks9 · Answer

The balloon decides it for me and I don't think it's close. A fixed rate that outlives my worst three years is worth giving up some price per unit for, because a refinance date is a date somebody else controls and I have no idea what the market looks like when it arrives.

I want the version where I know the payment. Six units at a better price per door is a real advantage right up until the year you have to refinance into a market that has moved and a lender who wants a bigger equity slug. Then it isn't an advantage, it's a deadline.

karen_whitfield · Answer

verity is naming the right variable and drawing the opposite conclusion from mine on some deals. A balloon in year seven is survivable if the building's income has grown enough that it appraises comfortably and you have reserves to bring cash if it doesn't. It's dangerous when the plan requires the refinance to work.

rigging, the number I'd want is what happens to the six unit at a rate two points above your quote and 12 percent vacancy. If it still covers debt service, the balloon is a scheduling problem. If it doesn't, you're buying the four unit no matter how good 115k a door looks. Hold length matters as much as either loan. Over twenty years I've stopped caring what the first loan costs and started caring whether I can refuse to sell in a bad year.

Fourplex on residential terms or a six unit on commercial, roughly the same cash in

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