Multi family financing

7 Replies

Maybe a newb question but wanted to get everyone’s opinions:

Why is multi family financing deemed “easier” to obtain as compared to a single family?

I’ve heard it said over and over in podcasts and I don’t know I’ve ever heard it explained how and exactly what makes it so appealing to banks/lenders and what makes it easier to obtain

I wouldn't necessarily agree that it's easier. The up front costs are a lot higher in terms of raw dollar figures. Even though the loan is based on the property and its cash flow, you and/or the team still have to qualify from a net worth standpoint.

@Matt Nettles

Hi Matt,

Thank you for posting! Good question.

In general, lenders underwrite single-family (4 units or less) and multifamily homes (5+ units) differently. Typically a single family property, as defined above, will be valued based on comparable sales in the area. This means, no matter how the single family dwelling “performs” financially, the potential capital appreciation is limited to the general value of similarly sold homes in the area. Multifamily dwellings are underwritten with financial assumptions, usually tied to a trailing income statement that reflects revenue and expenses over time. This allows the lender to see how reliable the property is in producing returns, and the likelihood it will continue to do so in the future. In effect, there is more information available to make a risk-adjusted lending decision when banks provide capital for multifamily properties.

This, among two or three other major variables (recourse vs. non-recourse, GP/sponsor track record), make it easier to secure a loan on multifamily deals. And by easier, we mean easier for the banks.

I wish you well!

All the best,

Daniel Reyes

@Matt Nettles , multfamily 5+ units is asset based lending. Lenders tend to look at the financial stability of the property before looking at the individual. First and foremost they want to make sure the property can produce enough income to take care of the operating expenses and service the debt. If so, then there's a good possibility they will fund the deal. With Single Family lenders are taking a look at your debt to income ratio. Once you get to 10 SFRs they will pull the plug on you. With multifamily they bank will lend out millions of dollars over and over again, as long as it can cover the Debt Service Coverage Ratio = NOI/Annual Debt Payments

@Tj Hines fantastic explanation TJ. Always grateful for you sharing your knowledge. Let me ask you another newbie question, what are the advantages of having interest only payments on a multi family deal? I’ve also heard that talked about a good bit about how the early years of the loan is interest only. I’m not sure I understand what makes that a good/bad thing

@Matt Nettles , yes IO is good for the 1st 3,4, or 5 yrs. I've even seen 7yr and 10yr IO's out there. The reason why IO's are good in this market we are currently in, it provides an extra layer of protection in case there's a contraction in the market, which one is for sure to come sooner than later. Not having to pay on the principle in a tightening market when rents may flatten or concede allows you to still cash flow and service the debt. The key here is to not over leverage your debt. Stay at 70/30, 65/35 or 60/40 I think 75/25 LTV as well as 80/20 are highly suspect loan to value ratios in this market. Hopefully this helps. Good luck my friend.

Commercial loans are based on property performance.  Residential loans are based on your personal income and comps.  You will pay slightly higher interest rates, higher fees, not as good of terms for a commercial loan.  However, the best way to scale in real estate is buying larger multifamily properties and commercial loans are required to buy those properties.