Before buying your multifamily property, it’s essential to know the different ways to get funding. This article breaks down the main multifamily financing alternatives that investors can access to grow their portfolios.
Are you thinking of diversifying your investment portfolio? Then perhaps you’ve thought of investing in multifamily properties to boost your cash flow. Investing in multifamily real estate is indeed one of the most profitable endeavors to get into, but only if you do it right.
Aside from the fact that it’s a great source of passive income, it can also boost your net worth and provide steady cash flow for both seasoned and first-time real estate investors. There are many options for multifamily financing that you can explore.
Best Multifamily Financing Options
There are different paths to get funded for your dream multifamily property. Some are pretty straightforward, while others may require a dose of creativity. These are the top multifamily financing options that are available for investors like you.
Conventional Financing
Conventional loans are the most common type of financing for multifamily investments, as it’s ideal for both investors and owner-occupants. Essentially, traditional lenders provide this loan enough to fund multifamily properties. This mortgage is excellent for multifamily investors who want to get loans with longer payment terms and one that allows them a 20% down payment.
As the name suggests, this type of financing traditionally follows the rules of Fannie Mae and Freddie Mac, so getting approved for this loan is dependent on meeting their list of terms and conditions. To apply for this loan, you can send your application to any mortgage lender, credit union, or bank. Again, Fannie Mae and Freddie Mac set the underwriting guidelines in conventional financing. The lender will then assess your application based on your income, credit score, credit history, assets, and liabilities.
Federal Financing
Government agencies also offer multifamily financing. Some of the best examples are FHA (Federal Housing Administration)loans, sponsored multifamily financing programs, Fannie Mae (Federal National Mortgage Association), and Freddie Mac (Federal Home Loan Mortgage Corporation) loans. If you don’t have enough capital as a down payment or plan to live in one of the units, this mortgage might suit you.
FHA Loans
Take note that the Federal Housing Administration does not issue the FHA loan. This mortgage is approved and processed through FHA-approved lenders and banks. Essentially, FHA backs a portion of the loan, which protects lenders in case the borrower defaults. Hence, the FHA-approved lenders can extend loans to borrowers with low credit scores, offer better terms, low closing costs, and agree to smaller down payments.
While FHA multifamily loans are more suitable for low-income borrowers, some real estate investors may still qualify for funding. This loan is suitable for those with low credit scores, first-time homebuyers, and buyers who don’t have enough money for the down payment.
Fannie Mae and Freddie Mac Loans
Fannie Mae and Freddie Mac are government-sponsored mortgage enterprises that provide liquidity and affordability in the housing market. Generally, they buy mortgages from banks or lenders and package these loans into mortgage-backed securities (MBS) to investors.
Today, the Fannie Mae and Freddie Mac loans claim a vast share in the multifamily mortgage market. Most investors choose this financing option to purchase or refinance multifamily properties. In addition, Fannie Mae and Freddie Mac loans generally offer low-interest rates with a steep leverage level of 75-80%.
There’s a wide range of loan terms available for the borrowers. It also includes cost incentives on properties that follow the green standard, such as sustainable construction and energy-efficient building. As for loan terms, both entities may offer five to 35 years at fully amortized fixed or variable rates. Fannie Mae and Freddie Mac also provide small loans with prices and terms specially packaged for multifamily properties with less than 50 units or worth less than $7.5 million.
As mentioned above, these federally-backed enterprises don’t offer loans directly to borrowers. You need to work through an approved lender like Multifamilydebt.com. After a quick analysis, we can help assess if you qualify for government-backed multifamily financing.
Portfolio Loans
Portfolio loans are long-term loans used to buy several properties simultaneously. With this loan, investors can buy a minimum of two units and up to 10 properties. This mortgage is permanent with loan terms ranging from three to 30 years. Portfolio loans are ideal for investors looking to finance various multifamily properties at once with flexible loan requirements.
A key feature of portfolio loans is that it’s non-conforming, which means that it doesn’t follow guidelines from government-sponsored enterprises (GSE). Hence, portfolio lenders can come in all shapes and sizes—from traditional banks, private lenders, or credit unions. They have the freedom to customize their underwriting guidelines to give their borrowers more financing choices.
Like hard money lenders, portfolio lenders prioritize the performance of the multifamily property rather than the borrower’s financial capacity. They impose lower credit requirements, and borrowers may get a better Loan-to-Value ratio (LTV). Their rates are typically higher than a GSE or conventional multifamily financing, but the upside is that it offers more elbow room in underwriting. Portfolio lenders base their rates on the investor’s risk requirements.
Short-term Loans
Do you want short-term financing to seal a deal as quickly as possible? Then short-term loans such as bridge loans or hard money loans can be an option for you. They are nonpermanent loans with interest-only payments. They are ideal for investors looking to renovate, and then sell a property for profit or increase the occupancy rate until it meets the requirements to transition to a permanent multifamily loan. Since the loan term is short, the interest rates tend to be higher.
Most short-term lenders focus on a property’s profitability and investor equity. This is why they may accept loan applications from borrowers with low credit scores. If you decide to go with this type of multifamily financing, then make sure to prepare all the necessary documents regarding the property’s financials. If you need money to cover or bridge the gap between buying one property and selling to another, a bridge loan is the solution. However, bridge loans may require a good credit score and set a higher interest rate.
Get Access to Multifamily Loans
As you can see, there are different ways to access multifamily loans that meet the investment goals of any investor. However, the value that a loan offers might differ from one investor to another. Take note, it depends on certain factors such as the location, borrower’s credit rating, interest rate, and down payments.
By exploring different financing options and calculating the property’s value, you’ll discover various paths in multifamily investing that you would never have thought possible. So, don’t let the lack of funds keep you from investing in multifamily properties!
Here at MultifamilyDebt.com, we make it quick and effortless for investors to borrow capital for their real estate investment. We cut the paperwork by 50% so that you check on those investment goals as soon as possible. Tells us more about your multifamily real estate or email us at info@multifamilydebt.com for any questions.