As an Investor, Know Your Multifamily Loan Options

If you’re serious about growing your commercial real estate portfolio—particularly your multifamily and apartment properties—then you will eventually have to secure financing in the form of commercial multifamily loans. Therefore, understanding exactly how these types of loans work is important before you submit your application, so you can increase your chances of getting approved.

In this blog, we’ll talk about how to get multifamily financing for apartment buildings that qualify as ‘commercial’ properties. We’ll also discuss the different types of commercial multifamily loans available and provide an overview of the loan application and approval process.

What are commercial multifamily loans?

Commercial multifamily loans is a short- or long-term financing solution that can be used to purchase, develop, or renovate a multifamily property that has five or more units.

Note that multifamily properties with less than five units are classified as ‘residential.’ We will only discuss ‘commercial’ multifamily properties in this article.

Commercial multifamily loans usually start at $500,000 and go all the way to millions—even hundreds of millions, in some cases. Different loan programs have different interest rates, loan limits, down payment requirements, and term rates.

Commercial multifamily loan programs can roughly be classified into three groups: conventional loans, government-backed loans, and private loans. Let’s talk about each one of them.

What are government-backed commercial multifamily loans?

Government-backed loans are either backed by or issued through the Federal National Mortgage Association (better known as Fannie Mae) or the Federal Housing Authority (FHA).

The great thing about government-backed loans is that they are classified as ‘nonrecourse’ loans. This means that should you (as the borrower) default on the loan, and the lender cannot personally go after other assets you own beyond the property that serves as collateral. So government-backed multifamily loans are safer in this sense.

What’s more, these loans boast competitive rates (either fixed or variable) and longer terms. Do note, however, that the minimum loan amount is quite high. It starts at $750,000 and is only available for properties that are already existing. You may not be able to get a government-backed multifamily loan for new development.

So, what exactly are the multifamily commercial loans available from the government? One of the most popular loans is Fannie Mae’s long-term financing program for ‘stabilized’ multifamily properties. It owes its popularity to the fact that it offers a high loan-to-value limit of 80% and a 30-year term, which for many investors is favorable.

Fannie Mae also offers short-term loans, including bridge loans and adjustable loans lasting five or seven years. There are also financing programs for mixed-use multifamily properties with alternatives uses, including public parking, office, and retail. On top of this, Fannie Mae offers rehab loans or subordinate modification loans that can be combined with other loan solutions.

What are conventional commercial multifamily loans?

Conventional mortgages for commercial properties are offered by traditional lenders such as banks, non-bank lenders, and credit unions. The minimum loan value typically starts at $500,000. This is why these loan programs are quite popular with investors who want to purchase commercial multifamily properties that are too ‘cheap’ to fund with government-backed loans.

Terms vary greatly depending on the loan program and the lender. Term length can be a short as 5 to 10 years or as long as 30 years.

When it comes to interest rates, conventional loans are more expensive than government loans. Rates are either fixed or variable. Most loan programs also require a sizable down payment, typically starting at 20%. But what’s great is that most banks extend construction loans for new developments, which the government doesn’t offer.

However, it’s important to note that conventional financing solutions are ‘recourse’ loans. Thus, the lender can go after the borrower’s other assets outside of the collateralized property in the event of a default.

What are private commercial multifamily loans?

As the name implies, private loans come from private hard money lenders Tampa—anyone from family members, colleagues, and friends who have money to invest, all the way to private lending companies.

There are many different types of private loans for commercial real estate, including hard money loans, stated income loans, and bridge loans. Interest rates are much higher than government-backed and conventional loans, but the application and approval process is much faster.

In addition, these loans can be funded within days. That is why even seasoned commercial real estate investors turn to private loans in order to take advantage of time-sensitive deals.

These funding solutions are also great for commercial properties that are not qualified for government or conventional loan programs. They let investors improve upon a multifamily property, build and establish a strong rental history, and eventually seek long-term permanent financing once they become eligible.

What is the loan process for commercial multifamily financing?

The loan application and approval process and documentary requirements vary widely depending on the loan program and the lender. However, most lenders will require the following documents:

  • Background information and resume of all applicants
  • Information on ownership percentages for all key owners (people or entities that have an ownership percentage of 15% or more in the owning entity)
  • A summary of the project (such as an executive summary and business plan)
  • An executed purchase contract
  • Information on overall project budget, renovation quotations, scope of work, and equipment or construction costs
  • Business and personal tax returns of all applicants in the last three years
  • W2s and/or bank statements, or other documents that verify income
  • Information about down payment sources
  • Personal financial statements showing personal and business debt
  • Projected profits and business revenues from the project for the next few years
  • Profit and loss statements in the last 2 to 3 years, plus balance sheets
  • Rent roll (for properties that produce income)
  • Information about the general contractor an architect that will oversee the construction or renovation
  • Architectural renderings and blueprints (or construction projects and new builds)

It’s always a good idea to have an expert guide you through the loan process, from preparing your paperwork to submitting them to different lenders.

You can seek professional help from a bank representative or loan officer or hire a mortgage broker. You could also turn to commercial finance experts that have access to a wide network of private commercial lenders if you’re looking for private funding for your project.

Your application will be sent to an underwriter who will review it against their standards. Expect the lender to ask for more information about the property’s financials, including its current and projected value and its debt-to-service coverage ratio. The lender will also want to know more about your experience in commercial multifamily real estate investing, your personal net worth, and your business plan.

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