Episode 24
24 - Commercial vs. Residential Mortgages – Everything You Need to Know
Episode Summary
In this episode of Get Real Wealthy Season 2, Quentin talks about the differences between commercial financing and residential financing.
Quentin says that residential financing is usually for one-to-four-unit properties, while commercial financing is usually used in the case of five or more properties. These could be industrial properties, retail properties, storage units, etc. The financing process is different depending on the type of financing. For example, for apartment buildings, you may only get a 75% to 70% loan to value if you're doing conventional financing. That means that you have a higher down payment. If you're doing a single-family home or a rental property, it's very possible that you can have a lower amount that you can put down, and get a higher loan to value.
With commercial financing, to get a higher loan to value you can use CMHC financing on commercial properties and you can go to 80% to 85% loan to value, sometimes even higher. In conventional financing, you're usually doing 25-year amortization but if you are in commercial financing with CMHC, you can do 30, 35 years, sometimes even 40 years amortization, and this will lower your monthly cost. When you're looking at residential properties, typically, it's based on your debt coverage ratio, which means how much your property can debt service.
He adds that if you are getting CMHC funding on a commercial property, it's going to take four or five months to get that and that usually isn't conducive to closing on an apartment building. So usually, you have to use some sort of bridge mortgage that gets you from the person to when CMHC financing is ready. He further adds that when you're looking at commercial buildings, you're usually looking at cap rate, the cap rate is made up of interest rate, the location of the property, and the quality of the asset.
For residential properties, the cap rate is based on the comparative method. There is a lot more paperwork involved in the case of commercial financing as compared to residential financing, so he suggests preparing everything in digital format ahead of time. The broker fees in case of commercial financing are also very high. When you're dealing with financing for commercial property, often they're going to be asking for phase one, phase two, and hopefully, you never get to a phase three, but phase one is usually a historical understanding of the environmental contamination of a particular building. Once you get a phase two done and it comes back clean, then you're able to get your financing in place.
You will also have to get a building condition report and appraisals, which can cost around $3,500 each. residential properties if you are doing a lower down payment because it's your first property not necessarily an investment property, but it could be if you're living in one of the units and it's a multi-unit property, you would be able to get a lower down payment and you would be paying that insurance or CMHC fee in order to do that.
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