how to get funded in first small multifamily 5 units and up

Question

Hi everyone. Newer investor here. I have a couple of small multi under my belt (up and down suite and a 3 unit)  I am considering to purchase a 5 to 6 unit next year but dont know how to begin. Lots of questions i need help with how to get financing. Can I place multi under a newly formed corp? What are the requirements for a commercial loan.  Any input is appriciated. Thanks

Patrick Belanger · Answer

Hi @Ian Dale Ibrado,

In Canada under the commercial
financing umbrella for multifamily, there is "conventional", "Regular
CMHC" and "CMHC MLI Select" which have different requirements
for debt coverage ratios, loan to values, down payment
requirements, amortizations, and interest rates. Each are better suited for
different business strategies.

You will need to personally guarantee the loan, and
have sufficient net worth and liquidity (which will again vary based on the
lender and product type). Each loan type will also have a number of fees that you will need to
pay to secure the funding (eg. you will be paying the broker for commercial,
whereas the lender pays the broker in residential financing).

My best recommendation is to talk with a
local commercial mortgage broker specializing in
multifamily lending. Are you still looking to buy a small multi in Edmonton?

Timothy Hero · Answer

Go DSCR. Fewer lenders in that space will do 5+, but the ones that do only require it to cash flow a 1.2 DSCR, decent credit, and a healthy market.

Ian Dale Ibrado · Answer

@Jeffrey Abraham The bank actually has a format but would like to have a better chance by having someone guide me. It will be next year though. I have just recently purchased my 3 suite property.

Jeffrey Abraham · Answer

You can get a business plan very easily what are you trying to do and I help you with a plan

Ian Dale Ibrado · Answer

@Jeffrey Abraham Thank you for a detailed response.  I was actually having a hard time trying to figure out the procedure.  I wasnt aware of the business plan part but was told it was a requirement if i had no record of business financials (newly formed corp)   Do you have a sample copy of a business plan for lenders?

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Ian Dale Ibrado · Answer

Hi Gino, appreciate your response.  Would love to see a copy of your credebility book. A business plan actually makes sense but through the years ive been listening and learning through podcasts and audiobooks, i havent encountered a business plan as part of financing.  I guess once you have one made, you can reuse it same format and edit the numbers.

thanks

Jeffrey Abraham · Answer

It's great to hear that you're looking to expand your portfolio! Moving up to a 5-6 unit property brings new challenges and opportunities. Here are some steps and considerations to help you get started:

Steps for Purchasing a 5-6 Unit Property

1. Forming a Corporation

• Create an LLC or Corporation: Yes, you can place the multifamily property under a newly formed corporation or LLC. This structure can provide liability protection and potential tax benefits.
• Consult with a Lawyer: A real estate attorney can help you form the entity and ensure it's set up correctly for property ownership and management.

2. Understanding Commercial Loans

Properties with 5 or more units typically fall under commercial real estate loans, which have different requirements compared to residential loans.

Requirements for a Commercial Loan

• Creditworthiness: Both your personal and business credit scores will be considered.
• Down Payment: Typically, 20-30% down payment is required.
• Debt Service Coverage Ratio (DSCR): Lenders will assess the property's income relative to the debt payments. A DSCR of 1.25 or higher is usually required.
• Property Appraisal: A professional appraisal to determine the property's value and income potential.
• Business Plan: Lenders may require a detailed business plan outlining your strategy for managing and profiting from the property.
• Experience: Demonstrating your experience with smaller multifamily properties can be beneficial.

Ian Dale Ibrado · Answer

Hi Gino, appreciate your response.  Would love to see a copy of your credebility book. A business plan actually makes sense but through the years ive been listening and learning through podcasts and audiobooks, i havent encountered a business plan as part of financing.  I guess once you have one made, you can reuse it same format and edit the numbers.

thanks

@Gino Barbaro undefined

Gino Barbaro · Answer

@Ian Dale Ibrado

Canada's financing is different than the states. Think of the bank as your biggest partner. They're going to want to know how you are going to be a steward of their capital, and sharing your business plan makes sense, especially if you've never done business with them.

We used to give them our credibility book. DM me if you want a copy of ours

Gino

Joseph Chiofalo · Answer

Hi Ian,

Yes, you can put your next purchase in the new LLC.

Some lenders may allow up to 85% financing on a multi-family purchase.

Do you have a property in mind?