Multifamily residential is a classification of housing where multiple separate housing units for residential inhabitants are contained within one building or several buildings within one complex. A common form is an apartment building. For lending purposes, multifamily requires a minimum of 5 residential units.
Bank Lender: Multifamily Rental
Banks can be a good alternative to Fannie Mae and Freddie Mac for Multifamily properties. Banks provide adjustable rate (ARMs) or balloon mortgages with fixed rate terms to match your intended holding period. Rates and fees are very competitive. Banks generally require a class A or B property, full documentation, strong property cash flows, solid borrower credit, liquid assets and investing experience.
Pros
- Low Rates
- Diverse property types
- Flexible underwriting
- Variety of loan programs
Cons
- Extensive documentation
- Full recourse
- Shorter amortizations and fixed rate terms versus CMBS or agency lenders
- Cash out refinances limited
Private Lender: Property Income Based
Private Lenders are an excellent funding source for long term multifamily loans. Private lenders generally loan to a broader range of property classes, loan amounts, borrower credit scores, and debt service coverage levels than banks or Fannie Mae and Freddie Mac. Private lenders fill the gap for smaller properties where required loans are below $1 million. Another benefit is that private lenders qualify “Ability to Pay” based on the cash flows of the subject property and not the overall net income of the borrower. Loans are generally risk based priced with the loan to value, credit score, debt service coverage ratio and investor experience determining the borrower cost of financing.
Pros
- Based on Lease Income
- No balloon
- Unlimited cash out
- Quick approval
- Fast closing time
- Wide variety of property types
- Limited or no seasoning required
Cons
- Need fair credit score (650+)
- Higher interest rate vs. banks
- Prepayment penalty
- No construction
Freddie Mac: Multifamily
GSE Agency Lenders include Fannie Mae, Freddie Mac and FHA. Agency multifamily loans generally are known for having the best rates available for high loan to values and long term fixed periods. Freddie Mac Multifamily loans are full documentation loans that require investor experience, solid net worth and properties that meet the agency requirements. Borrowers willing to go through the required documentation and process, while meeting the agency requirements, will be rewarded with a long term, low rate loan.
Pros
- Low rates & costs
- Higher leverage (80% LTV)
- Long amortizations (30-yrs)
- Cash out available
- Variety of fixed rate products
- Non-recourse
- Limited personal financial documentation
- Flexible prepayment options
- Assumable & streamlined
Cons
- Conservative underwriting
- Sponsor liquidity requirement
- Property must be stabilized
Fannie Mae: Multifamily
GSE Agency Lenders include Fannie Mae, Freddie Mac and FHA. Agency multifamily loans generally are known for having the best rates available for high loan to values and long term fixed periods. Fannie Mae Multifamily loans are full documentation loans that require investor experience, solid net worth and properties that meet the agency requirements. Borrowers willing to go through the required documentation and process, while meeting the agency requirements, will be rewarded with a long term, low rate loan.
Pros
- Low rates & costs
- Higher leverage (80% LTV)
- Long amortizations (30-yrs)
- Cash out available
- Variety of fixed rate products
- Non-recourse
- Limited personal financial documentation
- Flexible prepayment options
- Assumable & streamlined
Cons
- Conservative underwriting
- Sponsor liquidity requirement
- Longer closing process
- Property must be stabilized
Private Lender: Bank Statement Based
Private Lenders are an excellent funding source for long term multifamily loans. Private lenders generally loan to a broader range of property classes, loan amounts, borrower credit scores, and debt service coverage levels than banks or Fannie Mae and Freddie Mac. Private lenders fill the gap for smaller properties where required loans are below $1 million. Bank Statement Based loans take into account the gross revenue or stated income of the property. Loans are generally risk based priced with the loan to value, credit score, liquid assets and investor experience determining the borrower cost of financing.
Pros
- No tax returns
- No balloon
- Unlimited cash out
- Quick approval
- Fast closing time
- Wide variety of property types
- Limited or no seasoning required
Cons
- Need fair credit score (650+)
- Higher interest rate vs. banks
- Prepayment penalty
- No construction
Private Lender: Hard Money Bridge
Private Lenders are the primary funding source for Hard Money Loans. Hard Money Loans are often referred to as “Asset Based” Loans where the lender believes there is enough equity in the property to quickly dispose of it if the borrower were to default on the loan. Hard Money Loans are short term loans of 12 – 24 months duration. Lenders generally expect the loan to paid off through the sale of the property or a refinance by another lender. Hard Money loans are very useful when a quick close is required or the borrower is unable to obtain financing from traditional lending sources.
Pros
- Flexible underwriting
- Quick Closing
- Interest-only Payments
- Up to 2 Yr Term
Cons
- High Interest Rate
- Higher Fees
- Short Term
- Extension Fees, if more time is needed.
Private Lender: Rehab or Restabilization Bridge
Private Lenders are the primary funding source for purchase-rehab market. These lenders provide short term loans which include both the funds to purchase or refinance the property and funds to renovate the property. Pricing and loan amounts are heavily influenced by borrower rehab experience. Rehab funds are typically held in a rehab holdback account and released on draws.
Pros
- Flexible underwriting
- Quick Closing
- Interest-only Payments
- Pricing Based on Experience and less on Credit
Cons
- High Interest Rate
- Higher Fees
- Short Term
- Extension Fees, if more time is needed.
Preferred Equity Investment
Preferred Equity investors provide equity capital for use in the financing of Multifamily projects. Typically, Preferred Equity is necessary when the principals do not have adequate capital to fund the project with the senior debt alone. Many private lenders will lend 65%-70% of the total project costs. In the event the principals do not have the 30%-35%, Preferred Equity may be a good option.
Pros
- Low Owner Capital Investment
- Quick Closing
- Interest or Ownership % Based Options
- Wide range of property types
Cons
- High Quality Asset Only
- Experience Required
- Short Term
- Large Transactions Only