A common question among real estate investors that want to get into the multifamily investing space is how to get financing. What are the types of loans are available to investors? What is going to get the best returns? If you are asking this question looking for expert advice – before delving too deep – the number one thing to clarify is the number of units of the multifamily property you are looking to invest in. Why? Generally there are three categories of multifamily investment properties. The answer to this question will greatly determine your loan options. The these three categories are 2-4 unit, 5-10 unit, and 11+ unit multifamily properties.
2-4 Unit Multifamily Properties
While these are “multifamily” properties in the sense that there are “multiple units” – you will generally have very similar options for financing to traditional residential loans on single family rentals – think the traditional 30-year fixed rate conventional option or DSCR Loans – and the coveted 20% down payment option too. This is generally due to the fact that this is how the American housing giants – Fannie Mae and Freddie Mac – government-sponsored agencies, separate their loan programs.
Note that this is another example of where real estate “lingo” doesn’t always match with the standard English Language! “Multifamily” in real estate typically starts at 5 units or more, where 2-4 Unit properties, even with multiple units, is typically in another box.
5-10 Unit Multifamily Properties
If the properties you are looking at are more than four units, then the options are likely going to be a bit different. Typically, this financing options available for properties with these unit-counts have looked more like the options for commercial real estate or large apartment building financing. That means shorter loan terms, higher qualification hurdles and floating rate or balloon components.
Finding financing for multifamily properties in the 5-10 unit range typically means local banks and credit unions, or small balance commercial lenders. However, in the last couple of years, the Multifamily DSCR Loan option has emerged and become super popular with multifamily investors. Multifamily DSCR Loans, or DSCR Loans for 5-10 unit properties, combine the best aspects of DSCR Loans (30-year fixed rate, easier qualification and underwrite, low down payments) for properties that traditionally were ineligible for that type of financing. While these are a great revolutionary option – typically Multifamily DSCR Loans are only available for this narrow band of unit-count, generally 5 to 10 units, or sometimes 5-8. And most DSCR Lenders still are limited at a maximum of four units and don’t carry this option.
11+ Unit Multifamily Properties
For investors that are looking at multifamily investment properties with 11 units or more – then the loan options are going to look very different than the two other buckets (2-4 units or 5-10). This type of financing will typically look very different and more like a traditional commercial real estate loan.
That means a DSCR calculated based on a full NOI and expense load. In addition to the property taxes and insurance expense – the only expenses factored in on traditional residential-style DSCR loan financing – this calculation includes vacancy loss estimates, credit loss estimates, repairs and maintenance, utilities, management fees and more.
Additionally, the DSCR minimums are generally going to be higher (typically up to 1.25x), the loan to value ratios lower (higher down payments) and underwrite more sophisticated (which makes sense considering the size and scope of the property).
Many multifamily investors for properties of this size (such as more than 11 units) can syndicate capital and have more sophisticated financial and entity structures – its definitely a different world once you get up here in unit count.
In Conclusion
When you are looking to finance your multifamily investment property, make sure you have unit count in mind before you start shopping. The unit range can have a huge effect on your options. If you are just getting started in multifamily real estate investing (perhaps making the jump from SFR – single family rentals – or flipping) – make sure you are well prepared if you jump “up the ladder” too quickly. The world of 2-10 unit multifamily investing can offer a great “bridge” between SFR and Multifamily for any budding real estate investor.
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