The Most Common Ways to Finance a Multifamily Property
- The Most Common Ways to Finance a Multifamily Property
- How Do Multifamily Properties Work?
- Residential Financing for Multifamily Properties
- Commercial Financing for Multifamily Properties
- Fannie Mae Loans for Multifamily Properties
- What About Unconventional Options?
- Why You Should Consider Investing in Multifamily Properties
- Related Questions
- Get Financing
The Most Common Ways to Finance a Multifamily Property
Multifamily properties are a fantastic option for real estate investors. They tend to be low risk and have the potential to bring in a nice, predictable income. However, those who have never invested in one of these types of properties before might be wondering just how they might qualify for financing. After all, these are large properties, and this often means that they are going to be expensive. You will need to have a better understanding of multifamily property financing.
How Do Multifamily Properties Work?
Any building or home that has two or more units in it would technically be a multifamily property. They are on the same piece of land and the property shares a common title. Properties that have between two and four units will generally still be considered residential, whereas properties that have five units or more are considered commercial.
Why is it important to know that difference? Because it can make a difference when it comes to financing the property. You will typically be choosing from conventional loans or government-backed loans. Conventional loans tend to be smaller.
Residential Financing for Multifamily Properties
When an investor is looking at residential properties, they are likely going to be looking for conventional mortgage loans that are similar to what would be used for a single-family home. If you aren’t going to be living in the home and you are just using it for an investment, conventional loans tend to be the only option available to you.
However, if you are going to be living in one of the units on the property, it becomes “owner-occupied,” which provides some more options. In those cases, you might also be able to use VA loans or FHA loans since you are technically still living on the property.
For example, if you were buying a triplex, and you live in one of the units while renting out the other two, you would be able to choose from those other loan options. This is because they will generally require that the owner lives in the home that is being financed.
With these loans, you will find that they work the same as a regular loan for a single-family property. This means the down payments are going to be about the same.
Commercial Financing for Multifamily Properties
When you have a commercial property with all of those additional units, you will have to look at other options for financing. You need to have a commercial real estate loan, and these can be more difficult to get. They will often require that you have a larger down payment and that you have a shorter repayment schedule.
Fannie Mae Loans for Multifamily Properties
Fannie Mae is a government-backed entity that buys mortgages and could provide financing in some cases. Fannie Mae offers a wide selection of specialized loan programs, but there are two loan programs in particular that are popular choices for multifamily properties.
First, there is the standard multifamily loan program, which has a minimum loan amount of $750,000. With this option, it is possible to leverage up to 80% of your Loan to Value allowance.
You will, of course, need to meet the program criteria to qualify for this loan. These loans will usually be five to 30-year fixed-rate loans with 30 years amortization. Nonrecourse availability is written into the agreement. The program isn’t strict with debt-to-income ratio requirements, and you will need to have a minimum credit score of 680 and a minimum net worth that’s the same as the amount requested in the loan.
There is also a Fannie Mae small loan program that could be used instead. This can help to lower the fees for buying and refinancing multifamily properties. The loan amount ranges from $750,000 to $3 million, and it is up to $5 million in certain large cities.
This option has some incentives that could make it a good option for certain investors, as well. Up to 80% of the loan to value is available to you, and there are not any tax returns required. The loan is assumable for a 1% fee, which can provide some safety, and it amortizes in 30 years.
These loans can work well for some but not for others. It will all depend on how large of a property you want to buy. Those who are looking for apartment complexes and who need a commercial property will find that they could be useful.
What About Unconventional Options?
Above are the most common options for financing multifamily properties. However, there are also some unconventional options that could work in some cases.
Bridge loans and hard money loans could be used for those who only need a short-term loan and who expect they can pay off the property relatively quickly. These loans are typically going to range from 6 to 36 months and the payments are based on just the interest. The principal is paid when the loan term ends.
These loans are generally just going to be financing for properties that need to have fast cash for improvements that might be needed before a typical loan can be obtained.
Why You Should Consider Investing in Multifamily Properties
Now that you have a better idea of some of the main and most common financing methods used for loans, it’s time to start looking for potential multifamily properties in your investment area.
These are popular properties for investors for a host of reasons. For starters, they tend to attract a larger number of different types of renters. People often prefer renting to buying. Whether someone is looking to downsize after the kids are out of the house, or a young single person or couple is looking for an apartment, there are always renters.
You will also find that there are plenty of different sizes and types of multifamily properties available. There should be options that will work for your finances and needs. Take your time when determining what type of financing you should use, just as you would with taking out a loan for any type of real estate investment.
Related Questions
What are the different types of multifamily financing?
The different types of multifamily financing include:
- Conventional Loans
- FHA Loans
- HUD/FHA 221(d)(4) Loans
- HUD/FHA 223(f) Loans
- HUD/FHA 232 Loans
- HUD/FHA 232/223(f) Loans
- HUD/FHA 232/223(a)(7) Loans
- HUD/FHA 221(d)(3) Loans
- HUD/FHA 221(d)(3) BMIR Loans
- HUD/FHA 221(d)(3) New Construction Loans
- HUD/FHA 221(d)(4) Loans
- HUD/FHA 223(f) Loans
- HUD/FHA 223(f) Refinancing Loans
- HUD/FHA 223(f) New Construction Loans
- HUD/FHA 223(a)(7) Loans
- HUD/FHA 223(e) Loans
- HUD/FHA 223(e) Refinancing Loans
- HUD/FHA 223(e) New Construction Loans
- HUD/FHA 223(f) Loans
- HUD/FHA 223(f) Refinancing Loans
- HUD/FHA 223(f) New Construction Loans
- HUD/FHA 223(h) Loans
- HUD/FHA 223(h) Refinancing Loans
- HUD/FHA 223(h) New Construction Loans
- HUD/FHA 223(i) Loans
- HUD/FHA 223(i) Refinancing Loans
- HUD/FHA 223(i) New Construction Loans
- HUD/FHA 223(j) Loans
- HUD/FHA 223(j) Refinancing Loans
- HUD/FHA 223(j) New Construction Loans
- HUD/FHA 223(k) Loans
- HUD/FHA 223(k) Refinancing Loans
- HUD/FHA 223(k) New Construction Loans
- HUD/FHA 223(a)(7) Loans
- HUD/FHA 223(a)(7) Refinancing Loans
- HUD/FHA 223(a)(7) New Construction Loans
- HUD/FHA 223(f) Loans
- HUD/FHA 223(f) Refinancing Loans
- HUD/FHA 223(f) New Construction Loans
- HUD/FHA 223(h) Loans
- HUD/FHA 223(h) Refinancing Loans
- HUD/FHA 223(h) New Construction Loans
- HUD/FHA 223(i) Loans
- HUD/FHA 223(i) Refinancing Loans
- HUD/FHA 223(i) New Construction Loans
- HUD/FHA 223(j) Loans
- HUD/FHA 223(j) Refinancing Loans
- HUD/FHA 223(j) New Construction Loans
- HUD/FHA 223(k) Loans
- HUD/FHA 223(k) Refinancing Loans
- HUD/FHA 223(k) New Construction Loans
- HUD/FHA 223(f) Loans
- HUD/FHA 223(f) Refinancing Loans
What are the advantages and disadvantages of each type of multifamily financing?
The advantages and disadvantages of multifamily financing vary depending on the type of loan. Generally, multifamily loans offer better interest rates, longer terms, flexible terms, and higher leverage than other types of commercial real estate loans. However, some multifamily loans may come with prepayment penalties and required reserves.
Advantages of multifamily financing include:
- Better interest rates due to lower risk in the multifamily property sector
- Longer terms, with some financing types offering fully amortizing, long-term options
- Flexible terms, with borrowers able to shop around for the terms they’re looking for
- Higher leverage, with multifamily financing typically allowing for higher LTV ratios than other commercial real estate assets
Disadvantages of multifamily financing include:
- Prepayment penalties, which can be significant
- Required reserves, which can limit an investor’s flexibility
What are the qualifications for obtaining multifamily financing?
To qualify for multifamily financing, borrowers must typically meet certain qualifications, including having a good credit score, a sufficient debt-to-income ratio, and a history of making payments on time. Additionally, the condition of the property being financed will also be taken into account, as lenders will want to ensure that the property is in good condition and is likely to generate enough income to support the loan.
What are the best strategies for securing multifamily financing?
The best strategies for securing multifamily financing depend on the individual investor's needs and financial situation. It's important to consider all options and speak with a multifamily financing expert to determine which type of loan is best suited for your specific needs. Some key considerations to keep in mind when applying for a loan include:
- The type of loan you need (e.g. conventional, FHA, etc.)
- The loan amount and terms
- The loan-to-value ratio
- The interest rate and fees
- The repayment schedule
- The loan term
- The prepayment penalty
- The loan-to-cost ratio
- The debt service coverage ratio
It's also important to compare different loan products and lenders to find the best terms and rates. You can get quotes from us by filling in your details here.
What are the most common mistakes to avoid when financing a multifamily property?
When financing a multifamily property, it is important to avoid common mistakes. Some of the most common mistakes include:
- Not having enough cash on hand for a down payment.
- Not having a clear understanding of the loan terms.
- Not having a clear understanding of the loan repayment schedule.
- Not having a clear understanding of the loan interest rate.
- Not having a clear understanding of the loan fees.
- Not having a clear understanding of the loan closing costs.
- Not having a clear understanding of the loan pre-payment penalties.
It is important to do your research and understand the loan terms before signing any documents. You should also make sure that you have enough cash on hand for a down payment and that you understand the loan repayment schedule. Additionally, you should understand the loan interest rate, fees, closing costs, and pre-payment penalties.
Source: The Most Common Ways to Finance a Multifamily Property