How To Finance A Multifamily Property
If you’re a first-time investor, you may have been weighing your decisions on the property type you want to put your money into. You may have also heard that investing in multifamily properties can bring in much more capital than a single-family home. Luckily there are similar ways to finance a multifamily investment to financing a single-family home.
When looking for a mortgage, it’s essential to research and find the right lender for your multifamily investment. That way, they can help get things going and provide financing options explicitly tailored to your wants and needs!
Let’s go over the basic loan options and what differentiates them:
- FHA Loans
FHA- Insured loans are government-insured loans. These are the most common types of loans you may come across in your research. Most investors opt for an FHA Loan because they have the longest terms, lowest fixed rates, and require a smaller down payment than a conventional loan. When you work with a lender familiar with all the intricacies and details of FHA approval, your journey to homeownership will be much smoother. There are a lot of intricacies to the FHA loan approval process that you might not understand, which can make it a tricky and time-consuming process. A significant advantage of FHA loans for aspiring real estate investors is that these loans are generally non-recourse, meaning that the borrower does not need to put up other assets as collateral or have an excellent credit score. This type of loan is secured by the property only, and terms are typically 30+ years. You can buy a multifamily unit with up to 4 doors using an FHA!
- Freddie Mac & Fannie Mae
Fannie Mae and Freddie Mac are two government-sponsored entities (GSEs) that offer loans with different terms. They can be for 5, 7, or 10 years, interest-only, fixed-rate, hybrid rates, or ARMs. The Fannie and Freddie loans are a significant share of the multifamily property mortgages today, offering high leverage levels and low-interest rates.
Small loan programs are available from Fannie Mae and Freddie Mac for investors of multifamily properties with under 50 units or $7.5 million in the total purchase price. However, if you want to take out a loan from these companies, it’s not as easy because they don’t offer loans directly – instead, someone has to be approved before being able to do so! One way around this problem could involve working with an experienced lender. It is important to work with an approved lender if you want your home purchase to go smoothly.
- Bank Loan
If you’re looking for a way to buy, refinance or construct multifamily property, then banks are the first place that comes to mind. But be cautious because they have higher rates than other lenders and can demand recourse. This means that in case of default by the borrower, all assets will also become liable for repayment. So, ultimately, your goals or needs may not be best served by a bank loan.
- Conduit Loans
Besides being more stringent, CMBS loans have some other unique features that make them attractive to investors. They can be used for multifamily properties and mixed-use developments, which means they cater well with your investment portfolio. CMBS loans are commercial mortgage loans secured by a lien; its profits are collateral for the loan. You can acquire this loan at commercial banks, conduit lenders, and investment banks.
Investors have many options when it comes to getting a loan, but they should ensure that the terms of their deal meet what’s best for their investment. The bottom line is that it depends on the property, its credit quality and how much leverage an investor needs. Meet with a lender to discuss your options, talk with investors you may know, and research before you apply.
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Jim Thorpe is a Seattle-based entrepreneur and real estate expert with over 30 years of experience in real estate development. He works to find high-demand properties in low inventory areas for both developers and homeowners alike. One of his specialties is locating single-family homes in property parcels zoned for multi-family development. His rental portfolio now includes houses, apartments, and commercial properties. Thorpe’s dedication to his business has led to city-wide growth and development in the real estate sector.
Summit Capital Partners is a real estate development and management firm that operates out of Puget Sound and is owned by Seattle real estate expert, Jim Thorpe. They work to acquire off-market real estate and specialize in developing risk-adjusted solutions, allowing an assets’ value to increase over 6-12 months. Summit Capital aims to make a difference in the community where they do business.