There’s little doubt that multifamily real estate investments can establish a steady cash flow for investors. Often, multifamily properties provide a greater potential to earn more income and to increase net worth when compared with single-family homes, as long as you complete your due diligence. Of course, partnering with the appropriate lender can assist you with getting through the process. Before you begin, it’s important to understand the financing options available to property investors; that way, when the time comes, you can pick the multifamily loan option that best suits your needs.
How Multifamily Financing Works
Multifamily financing comes into play for two types of properties. First, there’s residential investment properties with 2-4 units. The second is an apartment building with five or more units. The difference between the two types is important because the number of units determines the types of financing options available.
For instance, conventional mortgages can only finance residential income properties between 2-4 units. Government sponsored loans and short-term financing options, conversely, can finance both residential income properties as well as apartment buildings with five or more units.
How You Can Acquire a Multifamily Loan
These government loans are funded by the US Department of Housing and Urban Development (HUD) or the Federal Housing Administration (FHA). They offer loans to investors looking to acquiring multifamily housing with up to four units. The first requirement for these loans is to work with underwriter licensed by the FHA—commercial mortgage brokers can often help you organize. In this process, your personal finances will be evaluated to ensure that you don’t have any outstanding debt. Depending on the number of units included in the property your investing, you’ll need to show evidence of tax returns, W-2s and possibly your financial reserves.
Down payments can range between 3.5% to 10% depending on your credit score.
In order to apply for a conventional mortgage, you’ll need a high credit score—typically a minimum of 680. Banks will also be evaluating whether your Debt Service Coverage Ratio (DSCR), the net operating income divided by total debt service, is over 1.25. Beyond that you may be required to show evidence of between 6 to 12 months of cash reserves, tax returns, and rent payments.
Bridge loans are short-term loans that can hold an investor over while they wait to secure a permanent loan. They are often necessary when acquiring a property. Bridge loans often have higher interest rates and usually cover terms ranging from 18 to 24 months—they sometimes come with an option to extend for 1-2 more years. If your building needs upgrades or your waiting for an agency loan, you might be interested in bridge loans. Lenders typically offer this type of financing in conjunction with or anticipation of long-term permanent financing options.
If you want to learn more about bridge loans, check out our recent post.
Commercial Private Money Loans
Private money loans are a suitable option for those looking to invest in multifamily properties, with previous investor or renovation experience. When it comes to private money loans, your previous property experience really matters, especially when it comes to multifamily– whether that be in investment or renovation. Private money lenders offering private money loans typical charge interest rates of between 8% and 12%. This type of financing is easier and quicker to access than the above options. It’s usually used as a short term financing solution, before either refinancing or reselling the property.
RCN Capital lends to real estate professionals, commercial contractors, developers & small business owners throughout the country. Whether you are looking to fix & flip properties or hold properties for rental income, RCN has flexible options that are suited to your needs. If you’re an investor looking for financing for apartment investing, RCN Capital has competitive loan options available. Connect with us today to discuss your next multifamily loan deal.