People say it on TV all the time: “Dream big.” Multifamily financing is reserved for savvy multi-family investors looking to own or lease multi-story condominiums or apartment buildings, renovate and rent out foreclosed business parks or multiple mobile homes, or own and lease multiple commercial spaces at the mall.
If you’re one of these investors, the only way to make that kind of real estate investment is through multifamily financing – getting a loan from a bank or other financial institution for use in multiple real estate investments. Even people with cold cash in the bank prefer multifamily loans because they can free up their money for more risk-averse investments or personal use.
When you decide to go into multifamily financing, you will become the principal debtor to whatever bank lends you money. This high-risk position reserves this financial instrument to only the most active investors, as passive investors are content with working knowledge or a minor stake in a multifamily financing deal.
Where to Get a Loan
Loan terms, economies, many other factors change weekly, so it’s impossible to give singular advice on where you should get a multifamily loan. However, with careful consideration of a few basic principles, it’s not that hard to get going in the right direction.
Going to a Bank
A lot of banks auction off foreclosed and distressed properties at a markdown compared to their original prices. Different banks have different metrics that will allow you to apply for a multifamily loan, but most banks will be willing to stretch if they see some promise from the properties you’re eyeing.
However, because banks take on higher risks for being so flexible, they might charge higher interest rates, periodic amortizations, and miscellaneous fees than other institutions. Banks are also extremely dependent on index funds, which could either work for you or against you.
Perhaps the biggest drawback when getting a bank loan is they rarely offer anything other than full recourse lending. As the borrower, you will not get out of debt until you repay your loan to the bank, and the bank can seize your other assets that are unrelated to the property.
Signing up for a Conduit Loan
Commercial mortgage-backed securities, also known as conduit loans, are more affordable than bank loans, but it’s harder to qualify. The less experienced you are as a property owner, and the more distressed the property you’re targeting, the higher their interest rates and fees.
When a bank gives you a loan, they lend you money that they’ve earned; conduit loans are marketed as security, meaning they’re packaged together with funds from a trust. The Real Estate Mortgage Investment Conduit is a trust that you can thank for making this happen, although their investors might not be as pleased to see their delinquency rates.
Insurance companies like to be involved when loans and risk-taking meet. Most insurance companies have been offering non-recourse loans to small and medium-sized businesses for decades, and their rates are competitive with the government’s rates. Some of the largest providers of multifamily loans in America are insurance companies, and they’re still accumulating more market share by the year.
The chances of qualifying for a multifamily loan from an insurance company can be improved if you’re trying to acquire a quality property. Insurance companies shy away from unnecessary liabilities, so they tend to stay away from neglected properties. However, they also provide better terms than banks and the government, with more flexibility and a lengthier hold period.
Even novice real estate investors have heard of Freddie Mac and Fannie Mae. They are government-sponsored entities or GSEs that provide loans that will help you save big on taxes.
If you’re an investor looking to borrow money so you can start a housing business, Fannie and Freddie can offer you the lowest interest rates out there. Also, if you meet their metrics for conservative water and energy consumption, you could sign up for their green program, further decreasing your interest.
If you’re a complete newbie to multifamily investing, here are a few useful terms you have to learn.
- LTV – Your total mortgage relative to how much your property is worth. If you take out a $2 million loan to buy a $10 million property, your LTV is 0.20. The higher the LTV, the quicker you’ll get a loan.
- Non-recourse and recourse loans – If you can’t pay back your lender, they might come after your other assets if you have a full recourse loan. For non-recourse loans, foreclosing your property is the only possible consequence when you can’t pay.
- Distressed and stabilized – These are two different types of properties: Stabilized properties have high occupancy rates, pretty much guaranteeing a good return on investment; any property with lower than a 90% occupancy rate for the past three months is distressed.
If You Need Help, Call a Professional
Multifamily financing can be a tricky business. If you’re ever unsure of anything, call Yankee Capital at (781) 400-8778 before moving forward with multifamily financing.