Multifamily investors and developers have a variety of options when it comes to securing financing for their prospective real estate acquisitions. The available lending products depend on factors such as the type and size of the multifamily project and the intended purpose of the funds.
A residential property needs to have five or more separate dwellings in order to be considered an apartment building. Because of the larger size of the asset, the loan underwriting process is a little more stringent.
The lender will take into consideration property metrics such as net operating income, debt service coverage, and loan-to-value (LTV) ratio.
They will also look at the borrower’s credit score, income, and industry experience.
The most popular types of apartment building loans include government-backed and bank balance sheet loans.
Government-backed loans are funded under the Fannie Mae, Freddie Mac, and the FHA programs and typically offer low down payment options and affordable interest rates.
Balance sheet or portfolio loans are originated by banks and remain on their balance sheets with no government backing.
Duplexes, triplexes, fourplexes, and condos fall in a category of multifamily housing referred to as one-to-four-unit properties.
The financing options for this type of real estate assets include conventional mortgage loans and loans backed by government programs such as FHA.
Owners who intend to reside in one of the units in the multifamily property can choose either loan option, whereas investors who will not be occupying a part of the property are limited to conventional financing only.
Conventional mortgages are the same type of loans individuals use to purchase single-family homes and are not backed by the government.
As the name suggests, multifamily construction loans are used to finance the development or rehabilitation of multifamily projects.
Construction loans typically have very short terms, usually just one year.
In some instances, the borrower may only need to make interest payments on the construction loan while the project is underway.
Once work is completed, the loan must be repaid, or alternatively, it could be refinanced into a permanent mortgage or a new loan. Construction loans are typically offered by regional banks and credit unions