The past decade has been favorable to real estate investors, especially those involved in fix and flip. But recent market conditions–including a nationwide affordable housing crisis, a decade of rising home prices, and steady rent increases—are leading more investors to seriously consider and turn to multifamily properties.
If you are new to real estate investing or have only dealt with single-family properties, there are important differences to understand, requirements to know about, and a few tips to consider as you look to invest in and find financing for multifamily properties.
Since many readers may be new to multifamily properties, definitions of a few important terms are as follows. A multifamily property often referred to as a multi-dwelling unit (MDU), is any property or home composed of two or more units, established on a single parcel of land with a common title. For the purpose of financing, a property with two to four units is considered residential, whereas properties with five or more units are treated as commercial property. This classification becomes very important as you seek financing, which you will read about in more detail below.
Seasoned multifamily investors already know this, but if you are new to multifamily investing, it is important to understand what to look for in an investment property. Investors in multifamily properties focus on three factors: net operating income, cash flow, and capitalization rate. If you are new to multifamily property investing, make sure you understand how to calculate these metrics and determine how your property pencils out.
As mentioned above, conventional lenders classify multifamily properties as residential or commercial depending on the number of units. The type of financing available and the requirements to get approved differ between the two types of properties.
In general, financing sources for multifamily include all of the sources you have for single-family, as well as others available only for multifamily. To start, you will learn about conventional loans before seeing some options for less traditional and more creative ways to finance the purchase of a multifamily property.
Investors purchasing a residential multifamily property can apply for conventional mortgage loans that are similar to conventional loans for single-family residences. If one of the units will be owner-occupied, a few more options become available. Owner-occupants can choose between Federal Housing Administration (FHA) loans, Veterans Affairs (VA) loans, or conventional financing.
Loans for commercial real estate require bigger down payments and often require shorter repayment schedules. However, the larger the loan amount required to finance a multifamily project often means more financial institutions are interested in talking to you. There are lenders who focus on multifamily and departments within large financial institutions that specialize in these types of loans.
Larger loans mean more fees for the lender, which can work to your advantage. When financing a quality multifamily property investment, you may find that more doors open and you are more likely to get the VIP treatment—or at least get someone to return your phone call.