I am very new to REI. I am looking for guidance on how financing for multi-family properties works. Whenever I make inquiries I am told to either go find a property or pay me to mentor you. While I have no problem with either scenario I am entering into a professional relationship blind. I would love to get information about how the process works, who the lenders are and what financing options are available.
Any information would be greatly appreciated.
@Anthony Martello , for properties that have a loan balance under $1M wouldn't qualify for agency debt. You would have to seek out community savings and loans banks. These lenders typically don't offer non-recourse debt. It would be recourse, meaning someone would need to guarantee the loan with networth and liquidity. The best debt is agency debt as they can go out as long as 10 and 12 yr terms with an IO for up to 5-7 yrs and it's non-recourse
I wrote an article on this that will hopefully provide some guidance. Basically you have local and regional banks, agency debt, CMBS debt and bridge debt. There are other options, but those are the main ones. Local banks are the best option for loans under $1mm, agency or bridge are often the best bet for over $1mm. Its all deal specific. Talk with some local banks and some mortgage brokers that deal with multifamily.
There are many options to finance multifamily so I would educate yourself. If you use a broker they get paid based on which loan you go with and some loans pay more than others so a broker may steer you in a direction that might not be the most optimal for your business plan.
Rule of thumb for commercial loans is your net worth has to equal the loan amount and your liquidity needs to be 10% of loan amount. If you can not personally do this you can bring in other guarantors to sign on the note with you.
The primary consideration in financing multi family projects is your primary source of repayment, the adequacy of the rents for the amount of debt. Make sure you understand how to calculate a debt service ratio first. Other criteria come into play regarding any type of commercial/MF loan in the strength of the sponsor, either financial and/or management experience. MF financing is also heavily dependent upon location. Lenders such as the agency debt have preferences to larger metropolitan locations.
Thank you all very much for this information, it has been very helpful!! It seems I have work to do!
I downloaded the FHA multifamily (says 5+ units) term sheet a week or so ago and it shows that they have non-recourse loans over for amounts over $750k so is $1m an old limit or that's what they shoot for?
@Danny Randazzo I’m looking at 5 to 10 units at the moment.
@Brandon Beaudoin thank you Brandon I will look at that!!
@Anthony Martello I have a 5 unit and it's a standard commercial loan. 25% down, personal guarantee, process was very similar to a conventional loan. W2's, tax returns, bank statements. Some additional paperwork for rent rolls and rehab spending as they advanced some rehab funding.
6.5% currently, 5 year fixed and then floating with prime, 20 year term.
Had the best luck with local banks in my area that knew the subject property.
Hope that helps,
@Tom S. So they are not just financing on the value of the property I have to qualify personally.
I guess I need to go make friends at the local banks in my area.
@Anthony Martello Correct, you have to personally guarantee the loan whether you hold it in your name or an LLC. There are "non recourse" loans out there where you're not guaranteeing it, but they're much harder to get and have higher rates.
Yes, it's good to make connections at local banks. Start by opening a checking account and putting some funds in there. Then if you have a property in mind, ask for the commercial lending department and go in to chat about it. They can lay out their requirements, so it's a pretty simple process. Most of the time you're not even in the credit application stage, you're just gathering info and starting relationships.
@Tom S. Thank you Tom!! I really appreciate your input!!
I contacted a few lenders who offered loans for investment properties. Residential loans are for 1 to 4 units, and you would get a better rate and potentially down payment if you live there too. You can put the loan in your name.
Commercial loans are for 5+ units, and those lenders have minimums on how much the deal had to be worth first before they'd consider it (the couple I spoke to wanted deals 500K and up.) They required it to be in an LLC with you doing the guarantee, but you didn't have to live there.
@Tiffany Stevens thank you!! I am interested in the commercial, 5 plus unit properties. I am going to interview lenders and also look for partners.
Typically 5,7 and 10 year terms over a 25 or 30 year amortization.
75% LTV on purchase, 65% on re-fi's.
Others are correct in that you need to qualify as a sponsor however, that becomes less important in a strong market.
It's tough to generalize because there are so many factors involved to determine rates and terms but hopefully this answers your question at a surface level.
A mortgage broker can be very helpful...yes, you will pay, but the amount you'll save in debt service by leveraging a broker's relationship will likely pay off hand over fist.