Multi-family or apartment loans are used to purchase income producing investment real estate. Loans are generally for five units or more dwellings and are categorized as apartment buildings or multi-family housing. Before securing financing for multifamily loans, lenders would like to know your experience as a rental owner and/or manager. They want to make sure you have experience owning, managing, collecting rents, and handling tenants. In addition, you should have a minimum down payment of twenty-five percent (25%).
Borrowers will typically pay a loan origination fee, appraisal, title and escrow, inspections, environmental and due diligence reports. Borrowers must purchase property insurance and flood insurance may be required if the property is located in a government designated flood zone.
Real estate investors at all levels of experience can benefit from multifamily real estate investment. The first-time investor can begin to build a solid, well-performing portfolio, while the experienced professional can use this kind of investment to enhance cash flow.
Investment properties often require specific financing strategies. Multifamily financing rates are typically between 4.5 percent and 12 percent with terms at around 30 to 35 years.
There are four types of multifamily loans:
Lenders will require bank statements, personal tax returns, business tax returns, business registration or entity documents, rent rolls, Net Operating Income (NOI, annual income, minus expenses that the property generates from its operations), a minimum Debt Service Ratio (cash flow relative to debt payment obligations) of 1.25 (a DSR of 1means that there is equal amounts of funds coming and going out.
If you have a number greater than 1 e.g. 1.5, that means that you have positive cash flow. A number below 1 would mean you have negative cash flow). Calculating your DSR is as follows: DSR= Net operating income (NOI) / Principal and interest payments. A Loan To Value (amount of the loan relative to the value of the property) is less than 75%.
First-time borrowers are often a little shocked the first time they apply for a multifamily loan, especially if they have gotten a mortgage for their own home. They do not expect the rigorous application process and are often taken aback at first. The truth is, lenders do look for more information when approving multifamily or apartment loans. The lender needs to be able to evaluate the property to determine if it is a sound investment. This means more steps and more information that must pass through their hands. They look at much more than a credit score…
It is the lender’s job to look at properties and determine whether or not they will increase in value and have the ability to sustain a consistent cash flow. The lender must assess the borrower’s financial health to determine if it is good enough to weather the stress and challenge of a loan for investment real estate.
Multifamily or apartment financing is very different from other real estate loans. This is essentially a business loan, and the lender will look at it as such. They need to ensure that the business is viable and the property is appropriate for sustaining it. These best practices by top financial experts help increase a borrower’s chances of getting the loan they want:
If you are looking for multifamily or apartment financing, start with Magilla Loans to find the right lender for your investment. Use our helpful tools like our debt-to-income calculator or mortgage calculator to learn more.