Hi BP, I wanted to ask if anyone has experience with or insight on the ease or difficulty of getting an interest only loan on a commercial multifamily property? What does it usually take for a lender to agree to these terms and or what are they looking for?
There are a couple of situations that would support an interest-only loan option for multifamily. Three of the most common:
1. Short-term (bridge) loan from a private lender - if you're purchasing a property in need of a lot of love and have a solid track record, you can often find a bridge lender who will put up a 1-3 year interest-only loan. Rates vary, but we're seeing 7-10% right now.
2. Interest-only period from agency or bank - if a property is cash-flowing but has some upside, there are options where the first X years are interest-only, then switches over to amortizing.
3. Full-term I/O from CMBS - here the lender would need to see a stellar track record, large portfolio, and a fully stabilized property with strong cash flow. In that case, it's possible to get interest-only for the full term of a loan with great pricing. Note that the loan would be securitized and you'll be dealing with an independent servicer, and exiting out of the loan early wouldn't be simple or cheap.
Can you share more about the project you're looking to finance? Location, cash-flow, size?
Anthony. We do interest only on multifamily, but only up to 4 units. Many commercial lenders offer it on 5 units plus. It's a common program due to investors wanting the cash flow increase that interest only provides. What are we looking for? Significant liquid reserves, ability to qualify for the fully indexed payment, and great credit.
The principal pay-down is pretty minimal on new loans. Why the need for interest only? I've had large commercial loans where the principal portion was less than $600/mo anyway. Are you running that tight @Anthony Greco ?
I have been thinking of using it as a strategy to take the additional cash flow and dumping it straight back into the property at a more rapid pace to improve the property enabling the ability to raise and stabilize rents quicker therefore increasing the properties NOI. This is not meant to be used as a means of squeezing into a deal without the ability to pay down principle and interest in a traditional loan but more of a way to surpercharge the ability to turn around a mismanaged property. I am a very risk adverse person and would only go into a property knowing that in the worse case scenario the property could still cover the debt.