New Construction 4-Plex - Financing and other Advice

6 Replies

Hey BP, I've recently sold off my Vacation Rental properties and I'm looking to get into small Multifamily Rentals. Everything in my area is priced too high to have any sort of positive cash flow. So, I've been looking into building one. I'm looking for advice from anyone who has done any new builds themselves. So far, I've Identified a few properly zoned lots, found a Builder that I'm currently testing out on a smaller project and ran a fairly in-depth Pro Forma.

The numbers are looking great and I'm ready to move forward with the deal. I have the Cash to purchase the land, but I will need to secure financing for the build. Once the build is complete I should have around 36% equity and would like to finance out all of my cash. The snag that I'm running into is finding a Bank to Finance this type of Investment. I've been to most of the local banks in my area and I keep hearing no. Does anyone have any advice on lending options for this? Any advice would be greatly appreciated.  

Keep trying. I found that 2-4 unit properties are tricky. Some banks are only set up to lend on one or two unit properties. Others are only set up to lend on commercial properties. While 2-4 unit properties sort of fall into single family lending guidelines, at least as far as FHA is concerned, banks often have their own rules.

I think your best bet would be to target the commercial players. Banks that lend on larger multifamily projects. I got my three unit deal financed by a local bank that only lends on non-owner occupied multifamily projects. If you mention you'll be residing in a unit once it's finished their lending guidelines prohibit them from working with you. You may just need to meet other players in your market and ask for a referral. Referrals make the world go 'round in this industry, I'm convinced of it.

@Greg Dickerson The banks have been turning the deal down based on one or more of these reasons;

1)They don't loan on New Construction.

2)They don't loan on Multifamily.

3)They don't loan on Investment Properties. It must be owner-occupied.

One a good note, I found a bank that offers this type of loan product yesterday. I'm waiting on a pre-approval and a net sheet, but so far it's looking good.

That’s great news. I always advise people going to multiple banks for exactly that reason. Thanks for the update.

2-4plexes in Bend should do very well.

A lot of banks aren't quite sure with what to do with these, especially for new construction, so just continue shopping around. I only bother with banks that I know beforehand make both (a) commercial real estate loans and (b) residential construction loans, since at least then they have two ways to underwrite your loan. Do keep in mind that your debt to equity is fine for a residential loan, but might be cutting it a bit close for commercial underwriting; they will undoubtedly stress-test your pro-forma.

Hopefully, the spread of ADUs on the west coast will help to get more residential lenders comfortable with income-generating small multifamily deals.