So today I wanted to pick a quick and simple or easy question because I wanted to just create a quick Ask Marco episode. And the reason for that is because I am very much behind the eight ball today. I fly out tomorrow morning for Baltimore for the think Realty real estate conference. And it’s something that they do four times a year in different cities, but because of COVID, they’ve had virtual events, but believe it or not, the hotel has allowed us to host a live event right there by the Baltimore airport. So if you’re listening to this before the event, great, see if you can drop in, you have to get tickets online. And there is a restriction to how many people they can have in the building. But in other cases, this is something they didn’t want to give up on because it’s their best live event.
So I picked a quick question here. Now keep something in mind about the question. Some people send in questions that are very basic, almost like a newbie, like questions. And some people send in very complex or sophisticated questions because they’re just had another level in their investing journey. And they’re more sophisticated. They have more experience than they’ve learned, but there’s no such thing as a dumb or stupid question. They’re all good questions. And everybody is at a different stage in their investing journey, as well as the education and knowledge, that and experience that they’ve gained over time. Whether you’ve just been looking into this for the last week or it’s been the last 10 years, it doesn’t matter. I try to answer some of these questions on the podcast. I answered some of them via email directly, you know, time permitting. And now I’m starting to actually offload some of them onto my team of investment counselors here to help me out with the questions that come in.
So, but today I want to grab a quick question and it is from Leo and he says, Hey, Marco really have enjoyed your podcast. Over the last few months, opened my eyes to a lot when it comes to real estate investing. My question is in regards to financing commercial multifamily properties, I’ve noticed in the past that several six plexes and eight plexes were advertised on your website, how would I go about getting financing for a six-unit or eight units, small apartment building. I’m not sure if you have already covered this in one of your earlier episodes, but if you can answer this, I would certainly appreciate it. Thanks so much, Leo.
You’re welcome Leo. So here’s the simple answer. First of all, I want to say that we don’t often have anything more than a four-unit. We do have a peppering more. So this year actually have 6 unit 8, 12, and 10 unit property. So these are just small apartments. They’re basically 6 to 12, maybe 14, 15 unit properties. Talk to your investment counselor here. If you’re interested in that because there aren’t a lot of those. And when they do come up, they will often come up quickly. When we just put them in front of the people who have interest in something larger than a four-unit. Now regarding the financing, as I’ve mentioned in the past, anything larger than a four-unit property is considered commercial property in the eyes of a lender. It’s still residential. I don’t care if you have a 500 unit apartment building, it’s still a residential property, but from a financing perspective, you’re dealing with a commercial loan from a commercial lender because it just falls under different guidelines. And the main reason for that is because what is defined by Fannie Mae and Freddie Mac in terms of loans, they basically call anything that is one to four-unit in size, a residential loan. And then anything outside of that, their definition is it’s a commercial loan.
So having said that, all you need to do is talk to one of many, many, many dozens, if not hundreds of lenders in the country, small and large, that deal with commercial lending. And often these lenders will lend directly to your LLC, which holds the property, not necessarily to you as a person. So this is kind of one of the differences between residential and commercial is they do look at you and your credit and often your credit profile and possible your income to qualify. But they’re also looking at the property and underwriting the property. They’re qualifying the property and its ability to service the debt on its own. And that’s why they look at a number called D S C our debt service coverage ratio. They want to make sure that that number is anywhere from 1.1 to 1.2, which is just the amount over in percentage terms if you will, that the property generates in terms of cash flow over its debt service.
So anyway, you could just look up DSCR on Google or on our website. We have a few articles on that, but it’s just a metric at the end of the day. They want to make sure that the property is sound. It is stable, which means that it’s fully leased or close to fully leased, that it has a strong trailing 12 months of rental income and cash flow. Sometimes they refer to that as the T12. So keep that in mind, but the terms are also a little different. So with commercial financing, you often have a 25, not necessarily a 30-year amortization. Now there are 30-year loans in the commercial space, especially for smaller properties. However, the terms are typically three, five or seven years in terms of what you fix for an interest rate. And then it resets. You have to essentially recast or requalify on that loan to continue the terms and continue amortizing the loan over the 25 or 30 years.
Those were the main differences. The interest rates are going to be very comparable or competitive, but that is really the answer to your question. I’m going to now throw it out as a site. I haven’t officially announced this publicly facing, but you may want to talk to me or my team here about your commercial lending needs. We are on the cusp of announcing the launch of Norada Real Estate Funding. And that will be a lending arm to provide you financing for commercial portfolio properties, or anytime that you are kind of stuck in getting a mortgage loan for your property or your investments after you’ve tapped out conventional.
So to say that in another way, if you have tapped out the number of conventional loans you can get, which is a, a number of 10 per person per credit score, then you can’t get any more conventional loans. You have to go to a portfolio lender, or if you’re a foreign national you’re out of the country, or if you are a person like someone I spoke to you today that is setting on a lot of assets, has a lot of liquidity. They have a strong credit score. So they basically have everything a lender loves, but they can’t show W2 or 1099 income because they are making a transition in their life. Maybe they’ve gone into a self-employed situation, or they’re building a new business. They can still qualify under the loan programs that we have, but they would never qualify with conventional financing, even though they don’t have 10 conventional loans. So this is kind of the similarity in what I just described with those more challenging if you will, borrowers and commercial financing, the similarity there is that they’re still looking at your credit score. They may look at your assets or your credit profile, and they’re looking at the property. It’s not going to be decided on your income or your ability to prove income. So that’s not the make or break.
Alright, I will have more about that coming up very soon on a podcast episode. And we’ll also have a page on our website that we’ll be announcing the financing through Norada real estate funding. That’s it for today. So, Leo, I hope this has answered your question. If not, just circle back with me and I will help you as best as I can. And with that, I’m going to wrap it up for today. Again, thank you for listening. I’ll see you all on our next episode.
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