Loan

New property investors always assume that with a high FICO score and down payment that getting a loan for that new investment property will be as easy as getting the mortgage for their home. During the past few years any idiot with a pulse could get some type of mortgage loan, albeit a risky one (eg interest only, negative amortization, etc). The realm of commercial lending operates differently. First off, you can't walk into your favorite neighborhood branch and expect to get a loan on a 10 unit apartment building (unless you live near a commercial lender). Only certain banks lend on the commercial side and last I checked most big, known banks (except WAMU) only loan for residential. Commercial loans, like any business loan, is risky and for these types of loans you need to find the right lenders in your area. One of the keys to successful property investing is finding a very good commercial lender.

Commercial property is any building with more than 4 units, or a 1-4 unit building with roughly 25% of the space occupied by a commercial space (eg mixed use). You may be able to get a residential loan on a building less with than 4 units and a commerical space occupying 33% of total sq footage, but it will be a stretch. A 1-4 unit building with all residential is considered a residential property but, generally you will have to state whether its owner occupied or non-owner occupied. Please keep in mind I'm a real estate agent, not a mortgage broker, so please consult with a qualified mortgage agent before buying property.

Lenders underwriting investment properties will look at the property as well as the borrower. For investment properties, the lender will generally fund the lessor of the loan to value ratio (LTV) or debt coverage ratio (DCR) methods.

DCR
Debt Coverage Ratio = Net Operating Income / Annual Debt Service

Your lender will tell you their DCR requirements. Typically 1.2-1.5, but in SF at least 1.0 (1 to 1 ratio of NOI to Debt Service). In other words, the property should break even.

You can also work backwards to find out how much of a loan you can get. If the annual income is 57,000/year and the bank has a DCR requirement of 1.2 then,

1.2 = 57,000 / annual debt service => annual debt service = 47,500
47,500/12 months = 3,958 approx, which is your max monthly payment.


Loan to Value
LTV can be anything. Typically for commercial, lenders require 30% to 35% down payment, so loan to value will generally be between 65% to 70%. In San Francisco, investors should expect to place a higher downpayment and hence lower LTV.

Have a favorite lender. Please post in comments.