Why to take out a residential mortgage vs a commercial mortgage when both could apply. The story of my friend Pete.
My friend Pete works in tech in New York, and he was interested in making his first real estate investment. He found a 3-unit apartment building in Brooklyn where he’d be happy to live in one unit, and rent out the other two for income. His hope is that he’d get both cash flow and property appreciation driving his investment returns.
Pete wasn’t sure if he could apply for a residential mortgage to buy this building, or if he needed to pursue a commercial mortgage. He did know that I worked in commercial real estate finance, so he gave me a call.
“Should I be using a residential mortgage or a commercial mortgage in this situation?”
I answered, “Well, it depends”
It depends on a couple of different factors. For one, it depends on whether the property will be held in an LLC, or if Pete will own it in his own name. It depends whether Pete has any other investors who will contribute equity capital, or if it’s all his own money. It depends on a few other questions too. Sometimes, you can simply choose which type of mortgage loan to take out against the property. Here’s how to choose:
For a more technical comparison between residential and commercial mortgages, see my colleague Huber’s recent breakdown here:
We’ve already stated that you can’t use a consumer mortgage for an LLC or a mixed-use property. But there are a few more limits to note:
Oh, what happened with Pete? He ended up pursuing a consumer mortgage (synonymous with residential mortgage) in order to secure the lowest possible interest rate in this case.