Investing in multifamily real estate can create a steady cash flow. Multifamily, as a subset of the broader commercial multifamily real estate industry, is relatively straightforward for the average investor to understand, particularly for those who have owned their own home.
Multifamily also has lower barriers upon entry than other property types, such as retail or office. It allows first-time investors to test the waters, starting with a property as small as a two-unit duplex. Even so, many are up against seasoned investors who can pay upfront with cash, and even though all-cash deals have become more common, investors don’t necessarily need deep pockets to get started.
Understanding the different multifamily property loans available to multifamily property investors is helpful. That way, you can pick the best loan for your needs when the time comes.
What are Multifamily Loans
Multifamily housing is a catch-all term for any rental property with two or more units. On the smaller end, multifamily housing can refer to duplexes, triplexes, and quadruplexes. Multifamily also includes townhouses, condos, and conventional apartment communities. Multifamily can also be further segmented by its audiences, such as student or senior housing.
This matters because financing multifamily homes with five or more units introduces multi family mortgage loan requirements, which are typically more expensive than residential mortgages with more complex documents and financials needed to qualify. Multi family loans allow real estate investors to purchase or refinance multi unit properties and are a great option for both new and experienced investors, with appealingly low-interest rates and terms up to 35 years.
How to Finance a Multifamily Property?
Unless you have several million dollars sitting around to invest, odds are you will need to explore the world of multi family finance. Discovering the best multi family lender or looking into raising capital via syndications can be a great start. It can be important to research your different multi family lending options for each property you plan to acquire, as property type and your business plan can dictate what type of multi family financing you’ll qualify for.
Loans for multi family properties will vary based on your business model. For those looking to pool their money and resources with individuals with varying skill sets that can carry out different parts of the business plan, you might consider forming a general partnership, and getting investments from accredited or sophisticated investors. This capital raised will generally be used to finance the capital expenditures associated with acquiring and rehabilitating a multifamily property, and the rest of the capital needed to fully finance the property can come from multifamily lenders.
Before jumping into the buying process, you’ll want to determine if you qualify for multifamily financing. Consider the following:
Down Payment
Compared to single-family homes, multifamily properties can expect a higher down payment. For example, if you’re seeking to buy a two-unit primary residence to kick off your multifamily investment, you’ll need a minimum of 15% down payment with a conventional loan.
Alternatively, if you’re considering investing in three to four-unit primary properties, you can expect a minimum down payment of 20%. Down payment requirements for conventional loans differ for investment properties, such as multifamily properties you are not living in (and if you don’t plan on living in one of your units, there is a minimum down payment of 25%).
Debt-to-Income Ratio (DTI)
Your debt-to-income ratio (DTI) virtually represents your monthly debt compared to your gross monthly income. Multifamily lenders like to see less money paid out each month in debt and more coming in as income. This includes car payments, student loans, mortgages, and even revolving lines of credit like credit cards are considered.
In other words, the lower your DTI, the better chance you’ll qualify for multifamily financing. However, the exact DTI requirements to be met will depend on the type of loan you’re considering getting.
How to Get A Loan for a Multifamily Property
To be approved for multi family financing, the answer deviates according to which loan you are applying for. Regardless, the common denominator between the four multifamily loans includes a fair credit score and some down payment.
Types of Multifamily Loans
There are four types of multifamily loans:
- Conventional Multifamily Loans
- Government-backed Multifamily Loans
- Portfolio Multifamily Loan
- Short-Term Multifamily Loan
A conventional multifamily mortgage is best for investors who want traditional multifamily financing for two to four units in good condition.
A government-backed multifamily mortgage is best for investors with five or more units or owner-occupants of properties with two to four units.
Federal Housing Administration (FHA) loans, also known as “FHA-insured financing,” are government-insured loans and tend to be helpful to buyers with limited savings or lower credit scores.
A Portfolio Loan is best for investors who want to finance multiple properties at once or do not qualify for a conventional mortgage.
A Short-term multifamily loan is best for fix-and-flip investors who want to purchase a fixer-upper quickly.
How to Qualify for a Multifamily Loan
The process for obtaining commercial multifamily loans from multifamily lenders will be similar to any small business loan, with the exception of providing property information and management agreements. Before reaching out about multi family lending, you’ll want to gather everything the lender might ask for. This could include property and personal financials, property information (address, unit count, tax bills, etc), insurance information, and any current agreements in place from leases and with management companies. This will help expedite the process and allow for a smoother qualification process.
Multifamily Construction Loans
The most common commercial multifamily loans are HUD (Urban Development Department), Fannie Mae (Federal National Mortgage Association), and Bank Loans. There’s no doubt commercial real estate has continued to perform exceptionally well over the years. Many successful investors began in multifamily real estate as it’s easier to be approved for multi family lending and has lower entry barriers, but it also comes with one major challenge; funding.
While a multifamily construction loan is like other types of property loans, a few differences distinguish them. The most noteworthy are the construction loan terms, interest rates, loan amounts, application process, purpose, and loan-to-cost ratio. Borrowers looking to secure a multifamily construction loan need to understand the types of loans that fit their needs.
HUD Loans
A HUD loan is a mortgage loan provided by private company lenders approved by the Housing and Urban Development Department (HUD). The FHA can also ensure this type of loan. HUD financing is helpful for many developers who don’t have adequate funding to finance their multifamily construction projects.
It’s recommended first to execute research on the loan program, contact the Department of Housing and Urban Development, ask for a credit report, provide all the documents needed, fill out the application, and pay the mortgage insurance fee, down payment, and all closing costs.
Fannie Mae (Federal National Mortgage Association)
Fannie Mae is particularly attractive to multifamily investors for its interest rates. It’s a reliable option for multifamily or home investments. However, the requirement for this type of financing varies depending on the mortgage product.
The cornerstone of Fannie Mae is its Delegated Underwriting and Servicing (DUS) program. It leverages private capital to finance multifamily housing. The program securitizes multifamily loans into mortgage-backed securities to provide liquidity to the multifamily market and ensure funds are available to subsidize workforce rental housing.
Bank Loans
As one of the most common sources of commercial multifamily loans, investors can receive funding through local banks or credit units at agreed-upon terms. While bank loan terms tend to be rigid and less likely to offer leverage, borrowers have more potential to succeed with a multifamily bank loan when it evolved from single-family home financing. This relationship-based lending foundation may allow the lender to be more flexible with the borrower’s shortcomings.
On the other hand, bank loans can offer smaller loan amounts with a faster close when compared to a government agency. They may also finance property reservation projects as long as the investor has strong supporting financials.
Multifamily Vs. Single Family Real Estate
A single-family home is a freestanding residential unit built and designed for one family. Some investors have reaped remarkable success from investing in one single-family rental property at a time. However, there are some key differences to be aware of.
In a single-family home, the systems that run the home are independent and autonomous from the nearby homes. On the other hand, a multifamily home with 20 units shares one roof, one heating system, and one property to maintain landscaping.
Single-family and smaller multi family homes with four or fewer units are considered residential property. Commercial multifamily properties have five or more units. This difference is significant for several reasons, including zoning and financing, as some cities restrict where commercial and multifamily properties can be built. Single-family can also be restrictive as some municipalities have banned short-term rentals or Accessory Dwelling Units (ADUs) altogether.
Additionally, financing is different for single-family and multifamily real estate. A conventional loan can be used when investing in a property with four or fewer units. In contrast, a commercial multifamily loan must be utilized in a multifamily property with more than four units.
Is Buying Multifamily Real Estate Worth It
Buying and owning an apartment building might sound cost-prohibitive, but multifamily property investments are quite attainable for many individual investors. There are many advantages to investing in the multifamily real estate sector, including greater potential for cash flow, and property appreciation, and it allows one to succeed through several strategies. Buying multifamily real estate can allow you access to easier and better financing opportunities, to grow one’s rental property portfolio quickly, and the opportunity (and luxury) to hire a property manager.
