How to Finance Multifamily Properties

How to Finance Multifamily Property

finance multifamily; apartment investing; real estate investing; multifamily investingUnless you plan to forego the benefits of using leverage and pay all cash for property, you need to understand how to finance multifamily and apartment properties. There are various options available with their advantages and disadvantages. In this article I’ll reference my personal path beginning with hard-money lenders to now using agency financing for purchasing apartments.

I’ll describe the following types of lenders:

  • Hard Money/Bridge Lenders
  • Conventional Lenders
  • Agency Financing

finance multifamily; apartment investing; real estate investingHard Money Lenders

The first commercial property we purchased was a sixplex in the Inland Empire region of Southern California. To finance this multifamily we used a hard money that financed our first residential properties. We had a good working relationship and felt comfortable they could close this transaction. Having a good relationship with a hard money lender is beneficial to your investing business.

Advantages:

  • They primarily underwrite the numbers on the deal and the feasibility of the property producing a profit. They focus on the plan for the property being able to pay back their loan. This contrasts with conventional lenders that will underwrite to the borrowers credit. If you have bad credit they are an easier option.
  • Rates are Interest Only. The loan principal needs to get paid off entirely either by refinancing or selling the property
  • Funding is quick within weeks vs. the typical 30 – 45 days for conventional lenders.
  • They will give higher emphasis to borrowers experience and track record. If you do several successful deals with them, they will give you better rates and other options as their confidence in your business increases. You can sometimes negotiate with them a little easier than conventional lenders, as they want to maintain your business.

Disadvantages:

  • Lower loan to values (LTV) from 50% to 70%. When we started they would lend 65% of the loan – we had to come up with 35% down payments. Nowadays I’ve seen some lend as high as 70% and some lend up to 80% of the after repaired value (ARV).
  • The money is expensive. They charge higher points upfront. It can range from 2 to 6 points. Nowadays points seem to be getting lower as the finance multifamily; apartment investing; multifamily investing; real estate investingenvironment gets more competitive.
  • Interest rates are higher. They can range from 8% to 12% and higher. As the environment gets competitive, I’ve noticed rates drop to the lower end.
  • Loans are typically short term – one year is typical. On our sixplex we were able to get 3 year loan terms.

Flippers are the majority of borrowers taking advantage of hard money due to the necessity for quick funding and its short term nature. Despite the money being expensive, it’s a viable option to prevent losing a deal.

When we started investing, hard money made sense as it was easier to get deals closed and the period in the market cycle (2009-2010) had values low enough for rents to produce cash flow with double-digit return on investments (R.O.I.) despite a 12% interest rate. We would eventually refinance with conventional loans at lower interest rates that included principal pay down and cash-out the hard money lender.


Our First Commercial Multifamily Deal Using Hard Money

Watch Short Video About Our First Commercial Deal


On our first deal we were surprised that our target lender was unwilling to do the loan. We had to scramble quickly and called every hard money lender I could find on the internet. I eventually found a guy that said “yeah I’ll fund this deal, I do loans for a lady in Lancaster with the same numbers all the time and it’s always worked out”. He did our 2 subsequent deals that helped us transition into the smaller commercial residential space on our six-plex. He helped us begin our investing business and we do deals together on our house flips to this day. Hard money lenders typically do not loan on larger commercial apartments. As values increased, their interest rates cut into the cash flows making it prohibitive. We had to adapt to work with conventional lenders.

Conventional Lenders:

finance multifamily; apartment investing; real estate investing; multifamily investing

Conventional lenders will also finance multifamily property. They’re banks everyone hears about on all media channels. The big names like Wells Fargo, Chase, Bank of America and other local banks that heavily advertise to compete for your business.

They are classified as conventional lenders because they offer similar standard types of loans to the general public. They don’t tend to deviate much from one another because they are governed by national banking and lending policy set by the federal reserve and government sponsored agencies (Fannie Mae, Freddie Mac). These agencies buy their loans on the secondary market, which allows the banks to free up space on their balance sheet to create more loans. Because of the regulatory environment they operate, they require vast documentation to be in compliance with industry policy.

Advantages:

  • They’re rates are among the lowest and vastly lower than Hard Money alternatives. Rates can range from 4.5-6%, depending the deal particulars and borrower’s credit.
  • They will lend with higher leverage. Typically for commercial loans they will be in the range of 60-75% and even 80% depending on particulars of the deal.
  • Loans are amortized up to 30 years depending on deal particulars and product offerings
  • Terms range from 5 to 10 years depending on deal particulars and product offerings
  • Because they have branch locations, they are more accessible.

finance multifamily; multifamily investing; apartment investing; real estate investingDisadvantages:

  • You will be required to submit every piece of financial documentation about your life, including personal and business tax returns, retirement accounts, all bank statements related to you, your family and your businesses. You will be asked to provide updated information for the same items as time passes during the loan processing period and up to the transaction closing. If any items are questioned by the bank you will be required to provide a “letter of explanation” to satisfy any questionable items.
  • If you have bad or no credit it will work against you. The lower your credit score, the higher your interest rate and if you have bad or no credit, you may be disqualified.
  • Loan processing time can take 30 days or longer, depending on how expedient the borrower provides documentation and how fast the lender representative can process the loan.
  • The lender may ask you to open an account for direct loan payment withdrawals in order for them to provide you with better rates or terms.

Protect Your Credit For Apartment Investing

Read this Short Article on How Your Credit Affects You for Multifamily Finance and How to Protect It.


finance multifamily; apartment investing; real estate investing; multifamily investingWithin a 12 month period between 2013 and 2014, we purchased two apartments using conventional loans with Chase and Wells Fargo. One property was in California, the other was in Texas. The California property was the last purchase in our state, as we were changing to the sellers’ phase of the market – prices rose rapidly. Hard Money loans with higher interest rates and monthly payments did not allow properties to cashflow. We had created a small portfolio that gave us credibility with Chase and Wells Fargo, plus we partnered with a strong investor in Texas.

Chase funded the California property but required large amounts of documentation and a higher down payment than we expected at 40%. Once all the documentation was submitted, it went pretty smooth. Wells Fargo did the Texas loan with a 25% down payment. They also required large amounts of documentation and revised documents as the process dragged on. They offered a discount on the interest rate if we setup an auto pay account in one of their branches, which we accepted.

finance multifamily; multifamily investing; apartment investing; real estate investingAgency Financing

Agency financing refers to Fannie Mae or Freddie Mac, which are government sponsored entities (GSE) that finance multifamily. On the commercial lending side, they tend to be the most competitive. They will not do small loan amounts. They are also more stringent on their due-diligence of the property.

Advantages:

  • Higher leverage – 80% and sometimes more, depending on deal particulars and if they offer any special products.
  • The lowest interest rates range from 4.3%-5% depending on deal particulars and product offerings
  • Loans are amortized up to 30 years depending on deal particulars and product offerings
  • Terms range from 5 to 10 years depending on deal particulars and product offerings
  • Interest only periods may be available
  • Level of documentation is not as large
  • Strength of borrowers (sponsors) experience given greater consideration in qualifying

Disadvantages:

  • Larger loans only – $1,000,000 minimum
  • Longer time to fund – 45 to 60 days
  • Building engineers and inspectors will visit the property and may require work to be performed
  • A repair reserves account may be required as part of the loan
  • Regular yearly inspections may be conducted.

finance multifamily; apartment investing; real estate investing; multifamily investingThrough a loan broker representative, we used a Freddie Mac lender to acquire a larger apartment complex. Having the loan broker guide us through the process was very helpful. After all the requested documentation was submitted, the process went pretty smooth. We were able to get 82% leverage as the property appraised for a higher value than the purchase. We also got an interest rate in the low 4% range.

I’ve discussed some of the common options to finance multifamily property, but there are others. CMBS (Commercial Mortgage Backed Securities), HUD and others exist and may be a better fit to finance multifamily in your situation. Since there are different options, we recommend working with a commercial loan broker that can guide you through the process for the best fit to finance multifamily property. We’ve found working with loan brokers is extremely helpful. They allow us to focus on purchasing and due-diligence and I periodically check in with them to see what financing is possible on a property we’re targeting and what’s possible in different cities/markets. I hope this article was helpful in your journey towards financing your apartment deal.

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