Planning to invest in multifamily real estate but don’t have enough capital for it? We have good news for you. Nowadays, more lenders are offering small-balance multifamily loans to interested borrowers. Here’s how to find the best deals that are right for your investment goals.
Investors are increasingly turning to commercial real estate as a vehicle to grow their portfolio’s value, and most will start with multifamily real estate as a springboard to launch their real estate investments.
And why not? Multifamily investments are generally simple for a typical investor to understand, since they typically have fewer barriers to entry than other commercial properties, such as office or retail. Investors can start small by purchasing duplexes or triplexes and progressively grow from there.
That said, these investors will eventually need to secure multifamily loans to make this a reality. The downside is those small investors have to compete against seasoned investors who can afford to pay in cash. While cash deals are quite common, one doesn’t need to be a wealthy magnate to start investing.
What is multifamily real estate?
Also known as a multi-dwelling unit (MDU), a multifamily property houses multiple residential units and can accommodate several tenants. Each separate housing unit has a living room, kitchen, bathroom, bedroom, and these independent units can be grouped in one or several buildings in one complex. Apartment buildings, condos, duplexes, triplexes, and townhouses are a few examples of multifamily properties.
Multifamily is actually a subset of commercial real estate, which is simply a catch-all term for an asset class, including multifamily, retail, office, industrial, hospitality and others.
However, there’s an exception. If a property has two to four residential units, they are called residential multifamily. With five or more units, the building now falls under multifamily commercial real estate, which has different financing requirements than residential multifamily properties. We break down the details for financing commercial multifamily properties, below.
What are commercial multifamily loans?
Essentially, commercial multifamily loans are short- or long-term loans intended for the purchase, development and renovation of multifamily properties with five or more units. The loan amount can range from $500,000 to millions of dollars, and the interest rates, loan limits and other requirements differ depending on the investor’s choice of loan program. Multifamily loans are a great financing option for both novice and experienced investors.
Types of multifamily loans
Multifamily loans come in different forms. However, they’re classified according to three broad categories:
Government-backed multifamily loans
As the name suggests, these are multifamily mortgage loans issued or backed by government entities such as Fannie Mae and Freddie Mac, and the Federal Housing Agency (FHA). There are more than five government-sponsored multifamily financing alternatives, which are used to finance commercial properties (five or more units).
The biggest advantage of government-backed loans is that they are considered non-recourse. This means that if a borrower defaults, the lender can’t seize other properties or assets the borrower owns beyond the put-up collateral property.
Additionally, Fannie Mae and Freddie Mac offer a wide range of multifamily loan programs with fixed or variable rates. As for the fixed rates, loan fees are amortized over the lifespan of the loan. On the contrary, variable rates are adjusted between three to 10 years depending on the recent LIBOR (London Inter-Bank Offered Rate).
Government financing is originated and offered through government-approved lenders. In fact, our team at MultifamilyDebt can help you find and match with the right government-backed loan programs. Whether it’s to purchase a property or refinance a new construction, we can work with top government lenders to provide you with loan options based on your specific needs.
Conventional loans
These are loans offered by traditional lenders such as banks and credit unions as well as other non-traditional lending institutions. A conventional loan is a good option for investors who want to buy low-value properties starting at $500,000. Depending on the conventional loan program, the term period may vary from seven to 10 years, up to 30 years.
Moreover, their interest rates are fixed or variable. It enforces a fixed rate throughout the loan term while resetting the variable term rate after seven to 10 years. Conventional loan rates are higher than government loans because this loan is conforming (it follows Fannie Mae’s loan amount and qualifications) and generally sold on the secondary market. Also, it is recourse and requires a minimum down payment of 20%.
Private loans
Lenders from the private sector may also offer multifamily loans. This type of loan is called a private loan. Family members, friends or private lending institutions offer private loans to multifamily investors.
Essentially, this is a short-term multifamily financing option that includes bridge loans and hard money loans with interest-only payments. This non-permanent loan ranges from one to just a few years at steep interest rates. If you don’t qualify for government or conventional loans, a private loan is another option to consider– and potentially a good option for investors looking to:
- Rehabilitate properties in poor condition
- Establish their rental history
- Improve occupancy rate of multifamily properties
- Transition to permanent multifamily loans.
Ready to invest in a multifamily real estate?
Perhaps you’re already considering multifamily real estate as an investment. If so, be sure to have a broad perspective of your investment goals.
Take stock of your risk tolerance, which will guide you on whether or not to invest in a multifamily property. It will also influence your decision on the location and type of multifamily real estate to purchase later on.
Those with high-risk appetites are open to investing in promising deals – properties that need more work or might take longer to see returns on, but the returns are high. In contrast, investors with a low risk tolerance are better off investing in established multifamily properties, including Class A properties in desirable locations. As they have low-risk profiles, they usually have the lowest returns.
Likewise, take into account how you’ll manage your multifamily real estate. Assess if you might want to manage the building by yourself or hire a third-party professional. This decision will depend on your expertise and the amount of time you can allocate.
Generally, it’s easier to self-manage small properties than a large number of multifamily complexes. If you have little to no experience at managing properties, you’ll need to consult someone with experience in this field. Some multifamily projects are difficult to navigate; it’s easy to get off track if you don’t have a solid real estate background and project management skills.
Acquiring multifamily loans has never been easier!
Nowadays, it’s easy to seek multifamily financing, as more and more lenders make small-balance commercial loans accessible to borrowers. Depending on the real estate project, some may receive better terms and rates. What’s great is that the market for short- to long-term multifamily loans is booming, and borrowers have a plethora of options to choose from.
As a rule of thumb, make sure to shop around and choose a program that meets your investment goals before sending that application. Whether you’re a first-time multifamily property owner or a seasoned investor who wants to beef up your portfolio value, MultifamilyDebt.com is here for you. We offer different financing options suitable for your unique investment needs.
Conventional multifamily mortgages are offered through traditional banks and lending institutions with lower closing costs. With a federally backed multifamily mortgage, you can seek multifamily loans through government agencies such as Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA).
Additionally, portfolio loans are suitable for investors looking for flexible loan requirements to purchase multiple properties simultaneously. Lastly, if you’re planning to renovate a property or increase occupancy rates of multi-unit property, a short-term multifamily financing option is the perfect choice for you.
To view loan options for your specific commercial multifamily investment needs, complete our quick online application and review loan offers from lenders in just a few clicks. Or if you’d like to learn more about the multifamily lending process, reach out to us at info@multifamilydebt.com.