Rental properties are one of the most popular forms of real estate investment. These properties can be either single-home with only one residential unit or multifamily properties that have multiple rental units. Examples of multifamily properties include town-homes, duplexes, condominiums, and apartment complexes.
Many real estate investors favor these properties because multifamily properties can be highly profitable. They provide investors with an opportunity to quickly expand their real estate investment portfolio. Another important reason is numerous financing options are available for multifamily properties.
As an investor, you need to partner with the right lender to get the best value from your loan and maximize your returns. This article explains different financing options for multifamily property so that you can choose the best one for you based on your investment needs and goals.
Fannie Mae and Freddie Mac Loans
Fannie Mae and Freddie Mac loans are one of the most common ways of financing multifamily properties. These loans are also referred to as Agency loans because a congressional charter governs the two mortgage companies. They often offer low-interest rates and high leverage levels (75–80%).
You can use these Fannie Mae or Freddie Mac loans to finance a multifamily property. These multifamily loans come with a variety of terms, including pricing incentives for properties that feature affordable housing or that meet certain eco-friendly requirements, such as energy efficiency.
Other terms for agency loans include adjustable-rate mortgages (ARMs), hybrid rates, fixed-rate, interest-only, and term periods of 5,7, 10, or 12 years. Fannie Mae loans may offer a term of up to 30 years. If you invest in a multifamily property of under $7.5 million or has fewer than 50 units, you can apply for a small loan program from the Agencies.
Access to Fannie Mae and Freddie Mac is available only through approved lenders. You cannot access multifamily loans directly from the Agencies. Instead, you buy the loans from approved servicers or sellers. This arrangement increases the number of multifamily loans that approved lenders originate.
FHA Loans
FHA loans are also referred to as FHA-insured financing because these loans are government-insured. Many multifamily property investors favor these loans because they have the lowest fixed rates, longest terms, and highest leverage levels (85–90%). They’re another type of Agency loan.
The approval period for these loans can be long, up to 6–12 months. It can also be rather difficult to understand and navigate the FHA-mandated guidelines and requirements. Furthermore, completing all the necessary forms can be a time-consuming endeavor.
Savvy investors in multifamily properties prefer to use financial advisories, such as Hasanov Capital, who are familiar with all the details and complexities of the FHA approval process. Doing so, can usually fast-tracks the process, especially when the borrower is motivated and prepared.
In addition to purchasing or refinancing a multifamily property, you can use FHA loans for substantial rehab projects or ground-up construction. As with other Agency loans, FHA is accessible to borrowers only through a limited number of approved lenders.
CMBS Loans
Also known as conduit loans, CMBS loans are commercial mortgage loans with investors secured by a first lien against commercial property. The property and the profits it generates serve as collateral for CMBS loans, which you can use to finance a multifamily property.
Other properties these loans can finance include properties for industrial, mixed-use, storage, retail, hospitality, and office purposes. The terms for CMBS loans are stricter than the terms for loans from the previously mentioned Agency programs.
For example, CMBS loans offer lower leverage than Fannie Mae, Freddie Mac, or FHA loans yet still require borrowers to be exceptionally creditworthy. CMBS loans are available through investment banks, commercial banks, and conduit lenders.
The CMBS mezzanine loan is one example of a recently introduced CMBS loan product on the market. This loan helps an investor to top up a traditional CMBS loan. Furthermore, the mezzanine borrower secures a mezzanine loan with their equity interest in the borrower entity under the CMBS loan.
Bridge Loans
A bridge loan is a short-term financing option that bridges a gap as an investor awaits approval of a permanent loan. Investors commonly use these loans when acquiring property. Bridge loans are often high-interest rate loans with terms of 18–24 months, typically with an option to extend the term another 12–24 months.
As you await approval of an Agency loan or if your multifamily property requires stabilization (improving rental rates or occupancy) or upgrades to meet the underwriting requirements for permanent loans, consider getting a bridge loan. This loan is often available in anticipation of or in conjunction with long-term permanent loan options.
Bank Loans
You can use a bank loan to construct, purchase, or finance a multifamily property. Just keep in mind that these loans often have stringent terms. They’re usually recourse loans, meaning that if you default, the bank can cease not only the property securing the loan but also your other assets.
Furthermore, banks are unlikely to offer interest-only options with leverage levels of 80%. The underwriting process for bank loans requires you to submit your tax returns. Nonetheless, a bank loan may be the most suitable option because of its structure or due to restrictions that certain Agency loans impose on the property.
Invest in a Profitable Multifamily Property
As an investor in multifamily property, your goal is to identify a financing option that meets your needs. And also that offers the best value. The needs, goals, and circumstances of investors vary. So a financing option that offers the best value for one investor may not do so for you.
The factors that determine the best financing option include:
- the property value,
- your creditworthiness,
- the amount of principal you can raise,
- and the amount of leverage you need.
Our nationwide team of financial advisors at Hasanov Capital can help you find creative business loan solutions. We will help you achieve your goal to invest in a multifamily property.
