I consider Seller finance an acquisition x financing method. There are several acquisition x financing methods in real estate.
Seller Finance - the previous owner becomes the bank
30 year / 15 year / 5ARM Mortgage - you bring a downpayment of 1-20% typically (multifamily requires typically 20-40% and you let a bank, or mortgage broker give you a colonoscopy in order to get approved for a loan.
Commercial vs. Residential Loan Terms
Down payment / LTV
Residential runs low-down: as little as 3–5% (FHA/conventional), so 80–97% LTV. Commercial wants 20–35% down, so 65–80% LTV. Lenders want you to have skin in the game.Amortization vs. term
This is the big one. Residential is fully amortizing over 30 years—your term equals your amortization, so it's paid off when the term ends. Commercial usually amortizes over 20–25 years but the term is only 5, 7, or 10 years, then a balloon payment. You either refinance or pay off the balance at the balloon. That refinance risk is the thing to plan around.Interest rates
Commercial rates typically run 0.5–1.5% higher than residential, and more of them are variable or reset at the balloon. Residential 30-year fixed locks your rate for the life of the loan; commercial rarely does.Qualification basis
Residential leans on your personal income, DTI, and credit score. Commercial leans on the property's cash flow—specifically DSCR (Debt Service Coverage Ratio), where lenders want ~1.20–1.30x, meaning net operating income covers the debt payment 1.2–1.3 times over. The deal has to stand on its own.
Heres the simple break down of our Green Hill Cottage Deal. In the following weeks I will dive into the construction numbers, expenses, and debt service because that is actually where underwriting a value add deal can go sideways.
Property Summary
22 Units, 24 Bedrooms - 1.5 Acres plus another 1 acre parcel with a 2 bedroom house
Note: I sold the house back to the lender for $345,000 reducing my loan amount to $1,650,000
Heres the site plan
Purchase = $2,000,000
DP = $5,000
Loan = $1,995,000
SOLD a piece back - reduced to $1,650,000
Currently have 6 Units rented out and we are brining in $9200 / month in rent. We have $6600ish in debt service and $2k in expenses. per month.
The construction costs project for tearing down and rebuilding the remaining 16 units is around $800,000.
Quick Math we are doing on our end.
Loan amount = $1,650,000
Construction Cost = $800,000
prior Investment in construction (from me last 2 years) = $300,000
NOI at Completion = $332,000 per Year
NOI / 7% Cap Rate = $4,742,857 - Future projected Value after Completion and lease up.
Tune in next week for the detailed breakdown of revenue and expenses showing how we got to these numbers.
— Alex Appolonia Appolonia Construction LLC | The Appolonia Ownership Project