Mortgage Financing for a Multi-Family - based on equity or income?

25 Replies

Hi everyone,

I have heard two different things regarding obtaining bank financing for a Multi-Family property (larger than 4 units). One is that the bank will finance you based on the income that the property will generate rather than the raw value of the asset (as they do with primary resident properties). The second is that they expect you to take at least a 30% or so equity position in the property so you have "skin in the game".

I wanted to know if it is possible to get a mortgage for more than 70% if the property looks like it has better than average earning potential, or if that is a hard and fast rule.


Different loans and LTV's are available based on the size of the loan and the property along with it's location.

Anything under 2 million in commercial is small for lenders. Some will not go under 5 million for a loan.

The stuff under 2 million is what most local banks have an appetite for. They will underwrite a loan very differently then a larger CMBS lender or a life insurance company.

So the answer to your question is 5 plus units it is about the stability and long term cash flow of the property but also some about the borrower just in case a "liquidity event" occurs. For example the property throws off great cash flow and has been stable for years but all of a sudden the property needs 50,000 injection due to an unforeseen larger repair. If the borrower doesn't have that money or the reserves to weather the storm the property could fall into a tailspin of disrepair and lead to a default on the loan. 

Thanks @Joel Owens  , so it sounds like you are saying you need minimum equity in the property as long as you have cash reserves? I had not heard that in the past. How much equity do you need, in practice? What if you don't have $50,000 in reserves. (I assume that is proportional to the value of the property). 

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You are trying to paint with too broad of a brush.

All multifamily properties do not fit into ONE box.

A size of a loan will determine many things. The demographics for an area among others.

1. What size property are you trying to buy?? 10,50,100 units??

2. What is the history of the property?? Is it vacant, 50% occupied, fully stabilized for at least 1 to 2 years??

3. What is your liquidity and net worth relative to the property you are wanting to buy??

I will respond in-line below. 

Originally posted by @Joel Owens :

You are trying to paint with too broad of a brush.

All multifamily properties do not fit into ONE box.

A size of a loan will determine many things. The demographics for an area among others.

1. What size property are you trying to buy?? 10,50,100 units??

Let's say 15-25 units total. Let's say up to $650,000 asking price - tops (which you can do in my market)

2. What is the history of the property?? Is it vacant, 50% occupied, fully stabilized for at least 1 to 2 years??

You are saying the more the unit is occupied, the greater the leverage the bank will give you? This is exactly what I was trying to find out.

3. What is your liquidity and net worth relative to the property you are wanting to buy??

Let's assume that my net worth is not significant relative to the property. 

The general rule is 20-30% down with a post close liquidity of 10% of the loan amount.  They will also want a net worth equal to the loan amount.  This all varies by the lender and loan amount.  This all can come from a partner in the deal, and doesn't have to be from you.

@Ilya V. Please post here on what you find. I'm watching this post with an interest as I want to get in to one such apartment building investment myself. Hope to learn how you resolve this. Wish you good luck!

Conventional financiers are unlikely to leverage higher than 80% - and that's rare.  However, you can indeed structure deals which blend conventional and private financing and thereby achieve 100% leverage.

The thing to understand is that financiers view you as a money manager.  While with large commercial property, the income of the property is at the core of the qualifying parameters, you, as the manager, have control over the success and sustainability of these revenues.  Therefore, achieving financing in the commercial space, now more than ever since the banks were burnt badly, is a function of them believing that you can cut mustard.

Can you? :)

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In Wellsfargo they told me that now loans are  given based on my income, and any income coming form rentals are considered income, only after 18 month receiving rent payments

IOW  future income doesn't count

I was reading : you buy this multi family, you rent it, then you buy another one and so on

Here in Northern NJ, owners don't finance, 

@Magesh R.  I am not talking about where you money is coming from. I am talking about qualifying for a loan from a commercial lender.  If you cannot satisfy the requirement( liquidity and net worth ) yourself, the you will need someone that will sign on the note with you.  Some lenders will require that they have some management control.

As far as the down and closing costs, that could come from you, a syndication, or some other source.

@Chai Sag  although I have provided my tax return, I have never been asked for my income.  WF may be talking about non commercial properties.

It depends again on what I said earlier about deal size will determine WHO the lender is. Local and regional banks lend on small properties. They also are audited by regulators on the loans they process and approve. Nobody on the loan committee at the bank wants to lose their job processing a marginal borrower or property. If the bank defaults and closes up shop they could also be facing criminals penalties from the feds for faulty procedures and gross negligence.

If the one loan that went bad was a whopper it can take them down fast. To a local bank with 20 million in deposits a 3 million loan is huge. For a CMBS multi-billion dollar lender it's small potatoes.


Now with the banks they want a local owner operator. That is where the experience and track record comes in.

The type of clients I have 2 to 3 million is a small purchase. Usually the purchase is over 5 million to over 10 million and up.

In this range the larger lenders put more emphasis on WHO is managing the property. When a lender is loaning out large money they want to be comfortable who is looking over the asset. So these are not ( joe bob do it yourselfers). These are professional commercial firms that manage in the millions of sq ft of assets. Especially with CMBS lenders they will be doing a lockbox account. They will advise tenants to send rent to the lockbox account. From there lender will keep an escrow account after paying mortgage for estimated TI, leasing commissions, property taxes, etc.

After all of that the remaining will go to the borrowers account for cash flow. This is kind of a forced savings account the lender places on the property. It's still your money but the cash sits their instead of being used by the borrower.

So the question then becomes how much cash will be trapped for these reserves?? That is based on the market appraisal and what they say for vacancy, per sq ft  for TI's and LC's, etc. Often we fight to get underwritten cash flow up with getting market vacancy up and TI and LC estimates reduced.

If appraiser says market at 8% vacancy we try to fight to five etc.

I do not mess with this no money down stuff. As a commercial broker it's a waste of time to work with such buyers. I have lots of clients that have tons of money wanting to invest. Anytime you are trying to throw a football 80 yards down field how many times will the receiver successfully catch it in bounds?? Not many. It does happen but not often.

I like the short high percentage passes............. : )

These NMD deals a lot of the investors were doing these 3 to 4 years ago when markets were just thawing from being frozen. Sellers were more desperate to get creative. Fast forward to today and those deals can still get done but have been severely reduced.   

@Ilya V.  - are you looking at stabilized or un-stabilized property? Like several people have said, commercial lending is a totally different ball game than SF. Even if you had the money to put down, the net worth to cover the asset (not including your personal residence), and the post closing liquidity, if you don't have the experience you probably won't get the loan. Running commercial is a full blown business, and the banks have the biggest stake in the game with an equity position often floating around 70%.

The bank is trusting that you can manage one of these things and keep their money safe. What the bank may ask is what does your SF portfolio look like, how long have you been managing it? If you have little experience they may say find a partner, buy a few duplexes and come back to us in a few years etc. especially if you are trying to go after non stabilized assets.

@Daniel Moore  , thank you. What size of operation are you talking about that would have these strict requirements? I am not looking to pull a loan for a couple million on my first go, but I would still want to finance a property or two at 70-80% that are 500k and under. Is that realistic, or will they demand experience even for this amount?

@Ilya V.  - it's all based on the lender. I would recommend going to smaller community banks or regional banks, and kind of lay out your intent and see how receptive they are to your ambitions. Try several. Remember the bank has the most to lose here, and they want to know they can trust the operations to you. Some may say yes we will approve you, but we will require a third party management company, or other stipulations etc. There are Fair housing laws, Landlord/tenant laws, document storage practices etc that you need to keep into consideration, and the banks will want to know that you know these things.

Also, be very careful running due diligence on properties, it's not hard to lose sight of a few things and wind up losing a few zeros.

I have a few proforma analysis sheets i could send ya.

Hi @Daniel Moore  ,

It sounds to me like a less than "set" process as it might be with SF where you don't even have to deal with the bank directly if your numbers are good. Would you say there is a strong "feel" element to it? (I.e. is it partially about the presentation, not just the numbers?)


@Ilya V.  - although MF is asset based lending, they are still qualifying the owner to run the business. Anytime I have approached a lender i bring a packet with my Balance sheet, PandL statements, a brief bio/resume, and supporting HUDs to show that I mean business.

Ultimately look at it like this, if were approached by somebody saying i want you to invest 70% of the startup capital in my business what would you want to see? Although banks loan money, they are investing into your business. Prove to them why.

My experience is that banks typically expect you to have 20 to 25% in down payment and another 5% in reserve. Some of it will depend on your net worth as well. But I have not encountered any bank that would go lower than 20%, so the maximum LTV is 80%. You can time the closing, and try to close in the beginning of the month that way the rental for that month gets prorated and comes to you during the closing, allowing you bring less money to the table on closing.

I've really found that it depends.  Financing a property with more than 5 units means you cannot use a regular conventional residential mortgage.  That means it's a commercial loan.  Banks have widely varying standards for commercial loans, but you need more skin in the game 20-30% minimum usually.  Brandon had a blog post recently that would be good to reference.  There's a lot of criteria, but they are generally more variable on a commercial property than a residential mortgage.  You will likely need to show some reserves.  The cash flow on the property must be sufficient to cover the note + some percentage above usually.  I'd recommend that you go talk to a number of banks (especially local banks for smaller properties) and see what they want in your area.

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