What are commercial Multifamily loan requirements/qualifications?

Question

Greetings ALL!Im a new investor looking to collect 70 commercial multifamily units!

My question for you is: What are the qualifications that need to be met in order for a commercial multifamily loan to be granted? (I dont mind starting with a 10-25 unit complex and building it up from there)

Thanks In advance!

Please tag someone who might know the answer to this question...

Any commercial mortgage Loan officers/backers/brokers; or an investor with applicable experience.

Mike Dymski · Answer

Credit score = 700+

Bankruptcies = none

Foreclosures = none

Net worth > loan

Liquidity = 9-12 months of debt service coverage

Leverage on all real estate < 75%

some REI experience (or you have a great balance sheet or low LTV)

These will vary by lender and loan size.

Darryl Dahlen · Answer

+1 on what Mike Dymski said. Since you will most certainly be obtaining a full-recourse loan your guarantee must mean something to the lender otherwise it's a mute point to have you as a guarantor. As such, your credit, income, and assets need to be sufficient enough to give the lender comfort that you can carry the property if need be.

This means your tax returns, bank statements, and credit need to be strong as does your post closing liquidity/net worth.

For now, you will need professional property management to handle the ongoing care of the property so using a reputable PM is key.

Richard Copeland · Answer

Hassan,

Even for your first deal, there are options available to you.  Your first loan doesn't have to be full recourse.  Depending on the loan amount non-recourse funding is available.  Being your first deal, the non-recourse lender will require an experienced 3rd party management company.  A recourse lenders may or may not require an experienced property management company.   If you can take down 70-units, I would suggest doing so instead of 10-25 complex.  That's due to economies of scale.  There are groups out there that offer mentoring and things of that nature.  I have one in mind I can suggest to you.  Send me a colleague request.  Mentors are all well and good, as I tell my clients, at the end of the day its just you and that property.  Thus make sure you are ready to take on the project regardless of the size and be smart enough to know when to ask and pay for professional help.  As Anthony mentioned, mistakes can be costly.

Anthony Chara · Answer

Some good info already posted above @Hassan Muhammad. I'll also add to it that most lenders will want to see a DSCR of 1.25 or higher. BTW, none of the answers have to be about you personally. If you don't meet one or more of the criteria above, you can always partner with someone that does meet the criteria. (In addition to the property meeting the lender's criteria.)

I think its awesome that you want to buy up to 70 apartment units and are willing to start with a smaller, 10-25 unit complex. However, I am concerned, based on the question you asked that perhaps you're not ready to buy a building just yet. I recommend you take some classes and/or find a mentor in your area that can guide you. Not knowing what you don't know can cost you tens or hundreds of thousands of dollars.

Orlando Oliva · Answer

@Hassan Muhammad All great answers above.  Remember that in financing a commercial property the most important thing is the cash flow generated by the property.  As mentioned above, most lenders require a minimum debt service coverage ratio of 1.25x; however the Freddie Mac Small Balance Loan calls for a minimum DSCR of 1.20x. You may or may not be required to guaranty the loan based on the type of financing you choose, but experience is imperative.  If this is your first commercial property, adding a property manager that has experience with multifamily in the market you are looking to invest in can help mitigate the lack of experience.  You can also choose to partner with someone that has already invested in multifamily (with more or a similar amount of units) to help you qualify for financing of your first one.  Bank's typically require a minimum credit score of 670, while Freddie Mac's minimum credit score is 650, consisting of the average of the 3 credit rating agencies or the lowest of two agencies.  Its best to not have any bankruptcies, foreclosures or short sales, but if you do, you'll need a good 7 to 10 years to pass so that the aforementioned can be cleared from your credit.  Generally you'll need about 20% to 30% down payment, you can estimate closing at 3% to 4%, and you'll need reserves of approximately 9 months principal and interest payments or about 5% of the loan amount.  Hope this helps.  All the best.

Orlando

Gary Harris · Answer

Hello,

Sorry, I don't know of any property managers in that area.

Gary

Mike Dymski · Answer

You can meet the net worth requirement by bringing in partners/investors, which can also increase your leverage in the deal depending on how you structure it.

I'd recommend spending a couple of weeks calling lenders, finding out their appetite for multifamily and their requirements, and starting your relationship with some of them.  You can do the same with mortgage brokers, which will accelerate the process because they will know the active lenders in your market and their requirements.

You are also going to want to learn the different loan structures that are available so that you can match the structure to your project, especially if your project has a rehab element to it.  There are likely many investors that make a living out of purchasing properties from owners who do not have properly structured financing or capital for necessary improvements.

Gary Harris · Answer

Hello Hassan,

It's dependent on the loan granting institutions specific requirements...however, generally they will want you to have experience owning similar type properties.  If you start out picking up a 10-25 unit complex then you should have had or have 5-10 units now and already have a property management company lined up to manage your asset and that has managed similar type properties.  If you are planning to self manage then you need experience managing that number of properties.  You will need a reserve amount of accessible capital of a few months mortgage and taxes in case something goes wrong.  The property needs to be at a relatively high occupancy to get a decent interest rate.  It basically comes down to money for down payment, capital reserve, your experience level,  experience level of property management, and current financial viability of the property itself.

Gary

Yannik Cudjoe-Virgil · Answer

One thing to note is if you are looking for non-recourse financing. Most of the time the loan balance has to be at least 1m. Freddie mac welcomes new investors. Fannie mae is looking for experienced investors or at least someone experienced on your team

Masha Sharma · Answer

Here is a free guide with minimal requirements for each type of a commercial real estate loan including multifamily loan.

https://landing.realatom.com/borrower_whitepaper

What are commercial Multifamily loan requirements/qualifications?

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