What is Multifamily Financing?

David Cohn
Oct 20, 2020
Multifamily Loans

Many real estate investors prefer multifamily properties because they are always in demand, which means that vacancy rates tend to below.

After all, multifamily housing is an affordable option for renters—not just families, but also couples and empty nesters.

You are probably looking for information on multifamily apartment loans if you are interested in buying such a property type.

This blog will look at the various types of multifamily financing available for investors like yourself and provide tips on applying for multifamily loans.

But before anything else, let’s define a “multifamily property.” As the term suggests, this type of real estate asset is a residence with more than one unit, thereby accommodating more than one household.

Multifamily properties are classified as either “residential” or “commercial.” Residential multifamily homes accommodate two to four households. Commercial multifamily assets, on the other hand, have five or more units.

Why Invest in Multifamily?

Because of its historically low vacancy rates and high demand, multifamily commercial properties are fantastic options for investors who want to diversify their portfolio.

It is a strong asset that tends to be stable and superior in bringing in passive income.

Those who know what they are doing can enjoy these benefits when they buy good multifamily and run it well:

  • Increased cash flow: Putting money in a multifamily building allows you to spread out your risks. Because you are buying multiple units that are not likely to go vacant all at the same time, you can always count on some income coming in from occupied units. And if you choose a property in a strategic location, you are increasing your potential to earn higher monthly revenue. Many seasoned CRE investors buy multifamily buildings in several geographically diverse markets to lower their risks even more while gaining multiple income streams.
  • Affordable acquisition cost: The cost of building multifamily is often cheaper than building a single-family home on a per-unit basis. And should you choose to use multifamily financing to build or buy this type of asset, you can expect the mortgage rates to be affordable, too. Many mortgage lenders offer competitive multifamily loan rates because foreclosures on these buildings rarely happen. And when your monthly payments are lower, your overhead is lower, too—which means more profit in your pocket.
  • Easier to manage - Think about it: It’s simpler to manage six units all in one roof than to handle six rental units in different parts of the city or state. Multifamily property investments make much sense this way. You can even hire a property manager if you don’t wish to take care of your asset's day-to-day running.
  • Tax breaks: Tax incentives are available to multifamily property investors. It’s the government’s way of incentivizing this segment to provide housing to the community. The tax incentives available depending on how your property is classified.
  • Better appreciation rates: Multifamily buildings tend to hold their value well and increase in value over time. Maintain it properly to ensure that you can sell it for more later on, should you wish to put it in the market.
  • Less risk: Like any real estate investment, multifamily properties carry risk, too. However, the risks are considerably lower because of the lower vacancy rate and almost zero possibility of a complete vacancy.

Those who are serious about building a solid real estate portfolio often buy multifamily investments. It’s a quick way to diversify without doing much work.

After all, it’s much easier to purchase one real estate asset with multiple rental units than it is to buy several single-family units.

What Multifamily Loans are Available?

Conventional Mortgage

A conventional mortgage is a type of loan that is not government guaranteed. It is used for traditional multifamily buildings with 2 to 4 housing units.

Rates are either varying or fixed throughout the loan term. You will need to make a down payment of at least 20%. Funds are typically released in 30 to 45 days.

Multifamily conventional mortgages require borrowers to follow strict guidelines. It would be best if you had a credit score of at least 620; the higher, the better.

Fannie Mae/ Lending Tree offers these loans, and terms range from 15 to 30 years. The maximum loan amount (as of 2019 from Fannie Mae) is $484,350.

Short-term Multifamily Financing

These loans are often called hard money loans or commercial bridge loans and are meant primarily for commercial-type multifamily assets.

They are used by investors to fix multifamily buildings in poor condition with the idea of selling them for more later or renting them out for higher prices once renovated.

Hard money and bridge loans are also used by investors who want to purchase multifamily properties before other bidders can swoop in immediately.

The funds can be used to get the project going while waiting to secure long-term multifamily financing with lower interest rates.

Short-term multifamily funding can be released in as little as 5 to 10 days. Some lenders require a credit score of at least 550.

Portfolio loans

Widely used by investors with bad credit scores, portfolio loans are easier to qualify for. Interest rates vary widely depending on the mortgage lenders.

The extremely high LTV rates of portfolio loans make them convenient for property investors on the lookout.

There are Four Types of Portfolio Loans:

  • Balance sheet loan – These are best for investors who may not qualify for conventional loans
  • Jumbo loans – Used for buying properties above the loan limit set for conforming loans
  • Blanket mortgages – Great for financing multiple properties using one loan
  • Cash-out refinancing – This involves taking equity from current properties to fund new projects

Government-backed loans

These FHA loans require very little down payment (as little as 3.5%). They also have the longest terms—as long as 35 years.

They can be used for properties with 2 to 5 units and are best for multifamily property investors who intend to occupy one of those units.

The minimum loan amount offered by Fannie Mae for these types of loans is $750,000, while the minimum for Freddie Mac is $1 million (with a maximum of $6 million).

Funds do take quite a bit of time to be released, though, so expect to wait 60 to 180 days. It would help if you had a credit score of at least 650.

What to do next

If you’re ready to buy your first multifamily building, the first step is to explore your financing options.

Get information from several lenders or talk to a commercial mortgage broker (if the property you want is classified as commercial).

This will give you a clearer picture of how you can go about funding your project. Don’t forget to consider how much you will likely spend on repairs and other costs, like application fees.

Next, choose a neighborhood. You can’t go wrong with multifamily homes in great school areas and access to public transportation.

Suppose there are nice cafes, restaurants, shops, and local businesses thriving there, even better. Check out what similar properties in the area are currently renting for.

You might also want to check the vacancy rates in the neighborhood.

It’s a good idea to hire a realtor because, in many cases, buying multifamily is more complicated than buying a single-family home.

Many processes can’t be done online. Be sure to work with a multifamily broker.

Once you have a property that you want to buy and a lender willing to finance it, get a preapproval letter.

This will give your offer more power because it shows the seller that you have the money to see the deal through.