Our ultimate guide to expertly financing your multifamily property

January 24, 2023 | Buyers

Explore the best options and qualified advice on how to finance this specific type of commercial real estate investment 

In recent years, the multifamily market has expanded exponentially and in 2021, the value of multifamily lending reached over $487 billion dollars. [1]

Whether you’ve recently gotten into multifamily investing or want to better understand the current state of the market, it’s essential to properly choose a loan provider to finance your property to experience the long-term success of multifamily investing.

Continue reading to explore the options for and expert advice on how to finance a multifamily property.

How do I finance a multifamily property?

Multifamily financing is acquired through different types of loans that are along the same spectrum as other commercial real estate financing options.

From government-backed to private lenders, multifamily investors can explore the opportunities provided by the different types of multifamily mortgages to determine the best choice for their unique real estate investment goals. Multifamily mortgages function in many of the same ways as single-family mortgages with each one having slight disparities in terms and interest rates.

There are also different caps on loan rates at the national, state, and county levels, so it’s important to assess the state of the current market’s loan rates when shopping for different lenders. 

Which institutions most commonly lend to multifamily investors?

The lenders that multifamily investors most commonly borrow from include:

  • Fannie Mae and Freddie Mac
  • United States Department of Housing and Urban Development (HUD) 
  • Life insurance companies
  • Commercial mortgage-backed securities (CMBS)
  • Banks/credit unions

“Banks, life insurance companies, and CMBS are financing options available to all types of commercial real estate investors, but Fannie, Freddie, and HUD are federally backed entities that directly lend on residential and multifamily real estate,” explains Joe LaFleur, co-founder and multifamily investment advisor at 100Units.

What does each type of multifamily lender offer to investors?  

With slight differences in terms and interest rates, Fannie Mae and Freddie Mac are relatively similar in the types of multifamily properties they commonly lend for with deals down to $1 million and up to $5 million for their smaller balance loan programs.

“You’ll often see Fannie and Freddie loans on an execution of purchase because they only take 60 to 70 days, and require relatively easy paperwork,” details Joe. “They also have some really good terms. Typically, they’ll give interest for two years, fixed rate for a 10 year term, and an amortization of 30 years.”

The caveat with Fannie and Freddie is that they have steep prepayment penalties or yield maintenance. That means that if your intention is to sell the property in a relatively short amount of time, you should go with a bank or credit union that has a low prepayment penalty instead of Fannie or Freddie.

Due to the steep amount of paperwork and six to nine month time frame, HUD loans are most commonly utilized for cash out refinances rather than execution of purchase. “HUD is a unique individual that takes years to get into, but once you get a HUD loan, it can be a 40 year, fully amortized, fixed-rate loan,” says Joe. 

Similarly to Fannie and Freddie, life insurance companies that lend to multifamily investors have high prepayment penalties, but they also have some fully amortizing products. 

When borrowing from CMBS, you’re essentially selling out to bond buyers who are seeking long-term, stable, easy-to-operate cash flow. They also have certain requirements, but their main issue is their variability in their ability to execute. “All CMBS lenders will tell you they have no problem with closing, but their probability of closing is actually much less than life insurance or Fannie Mae, but sometimes they can give you such attractive terms like interest-only for 10 years that it’s worth it to go down that road,” explains Joe.

The final option for multifamily lenders are banks—regional, local, national—and credit unions, and they are often one of the best options. They require minimal paperwork and the ongoing relationship with them is only a yearly check in on the property. They are easy to work with, and have low prepayment penalties—a major bonus for investors that want to resell quickly.

“Banks and credit unions have been our number one lender over the last 18 months,” shares Joe. “Out of all lenders, they’ve been the top ones in the multifamily space that we have executed with.” 

How much do I need in savings to qualify for a multifamily loan?

Aside from your closing costs and fees, most lenders will want proof of at least a year’s worth of mortgage payments in liquidity (meaning assets like cars or other properties do not count) to put them at ease in case of a loss of income. 

If you are a new investor who does not have enough cash reserves, you could consider partnering with another investor to act as your co-borrower and help you qualify for your desired multifamily loan.

What income can be used to qualify for multifamily loans?

In Florida and certain other states, multifamily investors can use existing or projected rental income to qualify for a loan in addition to income from their job or business. 

However, the ability to use rental income usually depends on the specific type of lender and it always includes certain parameters. For example, some lenders will allow applicants to count a certain percentage of their rental income from an existing property owned or the rent they expect to make from a future property. Even in those cases, the income must also be documented in a certain way and accurately adjusted for market rent rates. 

What’s the best advice you have for new multifamily investors seeking financing?

“If you don’t have at least a year’s worth of mortgage payments in liquidity, you have two different options to successfully execute on your investment,” explains Joe. “You could drop down your dollar amount and buy a small property, or find a co-investor who has a bigger balance sheet to prove liquidity and ability to execute to prospective lenders.”  

What’s the number one piece of advice you have for someone seeking multifamily financing?

“Whether you are a pro investor or new to the business, you should partner with a qualified mortgage broker that will shop your properties and you as an individual borrower to multiple lenders that match up with the types of properties you like and the type of borrower you are,” advises Joe. 

On the hunt for a qualified multifamily lender?

Check out our vendors list to access our vast network of qualified lenders, property appraisers, property managers, and more that are trusted by our expert team of multifamily investment advisors at 100Units. 

If you’re looking for further advice on investing in a multifamily property or searching for the right property to acquire in Florida, contact our team today at 866.GO.UNITS or fill out the form here.


1: Statista | American multifamily homes – statistics & facts

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