Multifamily Loans 101

If you are an investor focused on multifamily investments, you will most likely need to secure a loan to finance a property. Fortunately, when it comes to financing multifamily properties, there are several types of loans to choose from to help you take that big step into acquiring an asset. So, it is important to learn how multifamily loans work before submitting a deal offer, in order to make the loan application and subsequent process much easier.

This was the topic in one of my conversations with James Eng, National Director of Old Capital Lending and an expert in multifamily financing. I’m sharing here key points from our discussion so you’ll learn the different types of financing options available, how to qualify for a loan, and what the loan process is like. I’ll try to answer some of the often asked questions about multifamily financing by investors new to the syndication business. Click here if you want to listen to the full podcast episode.

What are Multifamily Loans?

Multifamily loans are short-term or long-term loans for the development, purchase, or even rehabilitation of multifamily real estate. Financing allows first-time investors and seasoned professionals with limited liquid assets to acquire multifamily properties through loans made available by lenders across the country. Interest rates, term rates, loan limits, and down payment requirements will all vary depending on the specific financing program.

What loan programs are available for multifamily investors?

Here are the financing options available to multifamily property investors:

Government-backed loans (Fannie Mae and Freddie Mac) or Agency Loans

Government-backed multifamily financing is sponsored by Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) and meets standards set by the Federal Housing Administration (FHA). Fannie Mae and Freddie Mac loans also called “agency loans” are non-recourse, meaning in the event of default, the lender cannot seize other assets owned by the borrower beyond the collateralized property. Competitive rates can be fixed or variable but the minimum loan amount starts at $750,000 and is typically offered only for existing properties, hence, not ideal for new developments. Fannie Mae offers long-term financing for the stabilized multifamily property with a 30-year term and a high 80% loan-to-value limit. They also offer shorter-term financing programs of 5-7 years, bridge loans, mixed-use multifamily loans for alternative uses including retail, office, or public parking spaces, or rehab loans that can accompany other loan programs.

Conventional Loans

Conventional loans are available if you do not qualify for government-backed financing. These are loans provided by traditional lending institutions including banks, credit unions, or non-bank lenders, and are suitable for investors purchasing a lower-valued property starting as low as $500,000. Terms vary from a shorter-term limit of 5 to 10 years to a longer-term of up to 30. Interest rates, which can be fixed or variable, may be higher than a government loan and lenders require 20% down or more. Most are recourse loans as well, meaning the lender can go after the debtor’s other non-collateral assets in case of default. The main pros of conventional loans though are financing for new construction or developments and the lower loan amounts. 

What type of loan suits my multifamily investment?

Fannie Mae

To qualify for a Fannie Mae loan, you need to meet the following criteria:

  1. Occupancy Rate: The property needs to be 90% occupied for the last 90 days to be considered stabilized.
  2. Net worth and liquidity of the general partners: You or your collective investor group need to have a net worth greater than the loan amount, and post-close liquidity – including cash and marketable securities, non-retirement – of at least 10% of the loan amount.
  3. Prior multifamily experience

“Fannie Mae and Freddie Mac provide loans on stabilized properties and requires sponsors to have a multifamily experience. On Fannie Mae, it’s probably 75% on the property and 25% on you as the borrower. If it falls outside of that box, you won’t qualify for a Fannie Mae nor for a Freddie Mac. That’s when you’re going to walk into a bridge loan or a recourse bank loan”, says James. 

With leverage from 75% to 80%, James says that agency loans have the best terms that you’re going to get anywhere that are non-recourse. “If a deal qualifies for Fannie and Freddie, it almost always wins,” he adds.

Bank Loans

“If your occupancy is lower or you don’t have the multifamily experience or you’re looking at doing your first deal then it’s probably a bank loan at the very beginning,” advises James.

Bank loan terms can be very stringent – loans are recourse, less than 80% leverage, interest-only options, and typically require tax returns as part of their underwriting. However, your needs and situation may be best served by a bank loan because of the loan structure, the pricing, and your limitations to qualify with agency loans.

Most investors doing smaller or non-stabilized deals use recourse loans, while investors who are buying stabilized, larger deals use the non-recourse Fannie Mae and Freddie Mac.

What’s the process to get a loan?

To obtain Fannie Mae or Freddie Mac loans, you will need to go to approved lenders that are authorized by these agencies to offer loans directly to borrowers. It will help to have a third-party mortgage broker or a bank loan officer to guide you through the process and help prepare your paperwork, which can be extensive and time-consuming.

Lenders in any capacity will want to know more about the property as a business and require extensive documentation for underwriting and will typically require the following:

  1. Property management agreements, current lease agreements, insurance policy declaration pages, and tax bills.
  2. If you plan to hold a title in a limited liability company (LLC) or other entity, you will need an employer identification number (EIN), organizational chart, articles of incorporation, and investing business plan.
  3. Property details: Address, photos, number of units, age, year one pro forma (your budget for the first year), and your rehab budget. 
  4. Property financials: Current operating statement, offering memorandum, TTM, rent roll, utilities, and copies of service contracts like landscaping, pool maintenance, and pest control.
  5. Personal financials and resume: your own and each key partner with more than 20% equity’s financial statement and balance sheets, and bank statements for any qualifying reserves or down payment funds.
  6. Schedule of real estate owned (SREO): list all properties that an investor has full or partial ownership of, including corresponding debt obligations.

James summarizes the process of securing a multifamily loan below:

  1. You (the general partner//borrower) receive the offering memorandum on a deal from your listing broker. You analyze the deal, find it good and decide to move forward with it.
  2. You send the paperwork to a mortgage broker who passes that paperwork along to a mortgage lender for underwriting and approval purposes. Your mortgage broker may take the paperwork to multiple lenders to find the best loan program that best fits your financial situation.
  3. The mortgage broker gathers loan options from various lenders for you to consider while assessing your qualification for a mortgage with those lenders at the same time. 
  4. Once you have selected a lender, paperwork will be done, funds are released and the loan transaction is completed.

James stresses the importance of having a mortgage broker who has established strong business relationships with lenders as this will move the application process significantly faster. “Also, they’re going to put out the best terms possible because they know that we’re not only going to bring them this deal but potentially more deals behind it,” he adds.

I don’t have the liquidity or multifamily experience – how will I qualify for loans?

Even without multifamily experience, you may still qualify for a loan but with conditions. Here are ways to do it as advised by James.

  • Find a partner who will sign with you on a Fannie Mae loan. That partner can be more than one person but at least one partner needs to have that multifamily experience. When you add up the sponsorship group’s total net worth and liquidity, the total should be greater than your loan amount. 

Example: A $10 million deal with an $8 million loan. The total net worth of all the key principals who are signing must total $8 million. After the down payment, you’ll still need $800,000 across all the KPs.

  • Do a recourse bank loan on a multifamily property and hold that property for at least a year – this fulfills the multifamily experience requirement. However, your next multifamily loan must be a comparable size to the previous one. Lenders want you to go up the ladder slowly i.e. If you do a ten-unit deal then the next should be about forty units, not two hundred.

“What’s great is let’s say on your first deal, you don’t have multifamily experience, but you sign with somebody else and then you’re on deal number one. Four or five months later, you are now qualified to do a deal on your own. If you have the deal and you have multifamily experience, you might need to just bring in net worth and liquidity using someone else’s balance sheet to do your next deal,” says James assuring that it will be a lot easier on your next deal.

What could delay loan approvals?

  1. Incomplete or late submission of documents 
  2. Withholding of information, such as bad credit

“If you have any prior bankruptcy or litigation currently against you, you need to tell the lender upfront. When we send you the loan application, there are questions like, “Have you ever declared bankruptcy? Do you have any litigation currently against you?” It’s always better to be upfront about that rather than the lender running a search and finding out,” cautions James.

  1. Declining occupancy rate 

“On the property side, as long as the occupancy and the property are stabilized, we haven’t had an issue. Sometimes, there are sellers who get the deal under contract and after a month or two, the occupancy goes from 90% to 85% to 80% and all of a sudden Fannie Mae can’t lend on the property,” cautions James.

  1. Lack of environmental report

It is crucial to have an environmental report done. Typically called a Phase 1 Environmental, this tells the historical use of the property and the surrounding areas that may affect the property – for example, gas or other chemicals may affect groundwater. Find out if your property is in a flood plain because it will have an impact on your insurance requirements that could double or triple the cost of your standard insurance policy.

FINAL THOUGHTS

Securing multifamily loans may sound intimidating at first. But with many loan programs available, it can be one of the easiest commercial loans to seek financing for. It’s wise to know your options and shop around before determining what program will meet your specific investment needs. Teaming up with the right broker and lender will surely help you through the process. Once you’ve secured a loan that provides the best value, you’ll enjoy the high ROI that multifamily investments generate.

Interested in multifamily investing? Life Bridge Capital is here to guide you. If you’re interested, we’ll be happy to talk to you. You can email info@lifebridgecapital.com and we’ll schedule a call.

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