New to Multifamily Loan Qualification

18 Replies

Hi there!

I'm new to multifamily and am looking to understand what sort of loans I will qualify for when trying to purchase a 16+ unit. I understand I'm most likely looking at 25% down with 6 months of PITI reserves.

My current situation:

  • I live in LA, currently house hacking
    • I ran my numbers and am planning to sell off everything and rent where I live and own where I rent
  • I own 2 single family homes that I'm planning to sell to acquire ~$400k for this multifamily purchase
  • I recently purchased 1 duplex
    • I'm assuming this can help season me as a multifamily investor
    • I'm planning to keep to 1031 in the future

My question is: Will I be able to acquire 30 year fixed 5% loans as a first time investor (this is just what I'm seeing for single family homes)?

I found this noting "Time in Business" and "Experience" which I don't really have yet since I just acquired my first duplex and it isn't quite what I'm looking to invest in with 16 units+ (seems like a chicken and the egg problem): https://fitsmallbusiness.com/commercial-real-estate-loans/.

Thank you!

A 16 unit MF will not be eligible for a 30 year fixed rate loan.  You will most likely see 5 and 10 year term loans with 25 or 30 year amortization schedules.  If you are lucky you  might get a 15 year term loan.  Properties of 5 units and higher are eligible for commercial loans such as these.  Those sweet 30 year fixed rate loans are only for 4 units and less.  You may be well served by seeking out a commercial loan broker. 

A 16 unit multifamily can qualify for a 35 year fixed rate loan under the HUD 223(f) loan program, however the fixed soft costs involved with that program generally are not economical for a request of that size.

Thanks @Ed Matson ! I definitely will be searching out for a broker, just wanted to get an idea of what I can find in my current situation because I was told I probably needed a partner that brought in experience and a larger net worth.

Thanks @Kyle Jean ! I didn't know about this HUD 223(f), do new investors like myself usually qualify with something like this? I haven't heard it mentioned before. I've always heard of FHA loans, but that comes from my experience with residential homes.

Originally posted by @Chris Ha :

Thanks @Ed Matson ! I definitely will be searching out for a broker, just wanted to get an idea of what I can find in my current situation because I was told I probably needed a partner that brought in experience and a larger net worth.

Thanks @Kyle Jean! I didn't know about this HUD 223(f), do new investors like myself usually qualify with something like this? I haven't heard it mentioned before. I've always heard of FHA loans, but that comes from my experience with residential homes.

Hard to say without reviewing your personal financials and resume and more information about the project. My gut tells me you would be better going the Freddie Mac small balance route with a lender like Arbor or Sabal. That program is much more cost effective for smaller projects and would still be non-recourse.

HUD does not have hard minimum experience requirements but they want someone generally credit worthy and financially sound.

Originally posted by @John Brady :
@Kyle Jean @Chris Ha Freddie and Fannie small balance have 30 year amortizing loans but both have a minimum loan of $1 million

 Correct although you could potentially get a waiver down to ~$880k or so.

@Chris Ha, 

In multifamily the number of units is important, the loan amount size, occupancy rate, if the seller can provide P&L's or tax returns, your experience, population, state, city, value per door etc. will determine which multifamily program you will be able to apply for. 

The HUD program has a 35-year fix and 35-year amortization, the loan amounts can go down to $2MM but many lenders do not want to lend on anything less than $3MM or higher. Plus HUD only allows you to pull money from an escrow account 2x a year plus you have to pay an auditing fee annually. The HUD program is awesome because the rate and the amortization are amazing, it really makes a property cash flow well. Even though the HUD program doesn't require you to be experienced, the program is truly created for a more experienced investor because of the cost and the structure of draws.

If your loan amount is $1MM above you can go to Agency which does offer 5-year, 7-year, 10-year etc. fix with up to 30-year amortization. Once again, the guidelines on agency allow $250K but most lenders do not lend unless the loan amount is above $1MM.

If the loan amount is below $1MM than you can apply for commercial loan programs that do offer the 5-year, 7-year, 10-year with up to 30-year amortization but the rate is going to be higher than agency rates.   The minimum loan amounts on some of these programs vary between $250K to $500K.

There are programs for loan amounts below $250K but the rates are even higher but you still have the ability to utilize the 30-year amortization.

You can go to the local bank and get a loan but their products are different.  The local bank typically offers a 5-year fix either with a 15 year or 20-year amortization or 15-year fix with a 15-year amortization.  The rates are better than the 30-year amortization but typically the PAYMENT ends up being higher on a 15-year or 20-year amortization.  Also, qualification and documentation are more tedious because the loan has to able to global debt service. Global debt service means looking at your personal and all business tax returns and then all your personal and business debt to calculate the debt service. Also when the bank calculates the debt service, they use a higher rate than what they quoted to test risk of the loan.  Some of the programs listed above require a global debt service but there are other programs that only debt service the property. 

@Chris Ha , think of a multifamily property as a business (really can't be anything else). Your are buying/financing an existing business (even if you live in it), so it already has income/expenses that will be considered. This is the way lenders view this and everything about the transaction will be considered this way. Therefore, they will want to see trailing financial data on the property and a proforma (among many other things) that they can underwrite the risk of default going forward. Even if you have plenty of liquidity, they will want to see what your plans are and how the property will perform. A good mortgage broker can help a lot with explaining this and what will be needed.

@Karen Schimpf Thank you for the invaluable information! I wonder if Agency or banks would take borrower’s net worth into consideration when qualifying commercial loans for multifamily properties? For example, if you need to borrow $1MM, do you need to show $1MM net worth in order to qualify?

@Chris Ha

Stop torturing yourself.  Go with a no income verification product.  A little more expensive, but less hassle.

Find a good mortgage broker.

Stephanie

@Haiyang A.   For agency, your net worth will need to equal the loan amount plus another 10% in post-closing liquidity.  There are programs that will allow qualifying with the down payment and the post liquidity but the ltv, rate and terms will be different.

@Chris Ha the answer is hiding behind the action. I believe loans are dependent upon credit scores so you'll have to speak to lenders and find out how much you can get. Just make the steps everything else will come together

Hey @Chris Ha

your debt structure on purchasing an apartment building is one of the most crucial elements. So you are asking a great question!

Getting debt financing for apartments (5+ units) is very different than debt financing for single family dwellings (4- units). So you want to really educate yourself on the topic. Here is a great white paper on the topic published by Old Capital:

https://www.wealthgrowinvestments.com/wp-content/uploads/2017/06/Multifamily-Financing-101-FINAL-2017.pdf

Another factor is getting a sense of the market for the debt of your project. If you have an accepted LOI or contract for an apartment it would be imprudent to only talk to one or two potential lenders, especially if it is your first deal and especially if you will be using local bank financing or bridge financing. If you talk to 5+ local and regional banks you will be amazed at the different term sheets you will see. And if you present a great team, clean underwriting and a clear business plan you will be amazed at how much these banks will be willing to negotiate to get your business.

Good luck!