Financing Options for First-Time Multifamily Property Investors
There's no question that investing in multifamily real estate can create a steady cash flow. In fact, the potential to earn more income and to increase your net worth can be greater with multifamily properties than with single-family homes—as long as you complete your due diligence.
Teaming with the right lender can help get you through the process. But before you start, it's helpful to understand the financing options available to multifamily property investors. That way, when the time comes, you can pick the best loan for your needs.
Fannie Mae and Freddie Mac Loans
Fannie Mae and Freddie Mac loans, also called “Agency loans" since they both operate under a congressional charter, represent a significant share of the multifamily property mortgages out there today, making these loans worthy of an in-depth look. Fannie and Freddie loans typically offer high leverage levels—75% to 80%—and low interest rates.
Investors can use Fannie Mae and Freddie Mac loans to buy or refinance multifamily properties. A variety of loan terms are available, including pricing incentives for properties that meet “green" standards—such as reducing water and energy use—or that have an affordable housing component. Terms from both agencies can be for five, seven, 10, or 12 years, interest-only, fixed-rate, hybrid rates, or ARMs. Fannie Mae is also able to offer terms of up to 30 years. Both Fannie Mae and Freddie Mac have “small loan" programs with terms and pricing for investors of multifamily properties with under 50 units or under $7.5 million.
In order to obtain a Fannie Mae or Freddie Mac loan, you must work with an approved lender such as Greystone*, since the Agencies do not offer the loans directly to borrowers. Instead, they purchase the loans from approved seller/servicers of such loans which enables such approved lenders to originate more multifamily loans.
FHA loans, also known as “FHA-insured financing" because these are government-insured loans, are often desirable for investors because they offer the longest terms, the lowest fixed rates, and the highest leverage levels— up to 85% to 90%.
This type of Agency loan can take some time for approval, as much as six to 12 months, and it can be tricky to understand and wade through all the FHA-mandated requirements and guidelines, including filling out all the forms—all of which make the process a lengthy one. When you work with a lender who is familiar with all the intricacies and details of the FHA approval process, however, the process is usually much smoother and can be quicker, particularly with a prepared and motivated borrower.
Another benefit for borrowers is that FHA-insured loans are generally non-recourse, meaning the loan is secured by the property only. Terms are often 30 or 35 years.
FHA-insured loans for multifamily property investors are available not just for property purchase and refinancing, but also for ground-up construction and substantial rehab work. In fact, construction to permanent loans are a fast-growing FHA product right now because banks are tightening their construction financing requirements.
Like Fannie Mae and Freddie Mac loans, FHA-insured loans require borrowers to go through an approved lender. Greystone, one of a limited number of FHA-approved lenders, ranks as a top FHA multifamily loan originator because of its experience in the industry.
CMBS loans, also called conduit loans, are commercial mortgage loans secured by a first lien against commercial property. The property and its profits are collateral for the loans. Investors can use CMBS loans for multifamily, mixed-use, industrial, retail, storage, office, and hospitality. The terms are more stringent that a loan originated under one of the above agency programs – such as lower leverage - and borrowers still need to be highly creditworthy.
You can get CMBS loans through conduit lenders, commercial banks, and investment banks. An innovative new loan product on the market, a CMBS mezzanine loan, helps fill a capital gap on top of the traditional CMBS loan. Mezzanine loans are secured not by the property, but usually by the equity interest of the mezzanine borrower in the borrower entity under a CMBS loan.
Bridge loans—that is, short-term loans that bridge a gap while you wait for a permanent loan to come through—are often necessary when acquiring a property. These loans typically have higher interest rates and are for terms ranging from 18 months to two years, often with an option to extend for one to two more years. If you need to wait for an Agency loan to be approved or if your building needs upgrades or stabilization - i.e. improving occupancy or rental rates - to meet underwriting standards for permanent loan financing, you might be interested in a bridge loan. Lenders often provide this type of financing in conjunction with or in anticipation of long-term permanent financing options.
You can get a bank loan to buy, refinance, or construct a multifamily property, but terms can be very stringent. The loans are typically recourse loans, meaning the bank could go after all the borrower's assets and not just the property securing the loan if you default. In addition, banks are typically less likely to offer 80% leverage, interest only options, and they typically require tax returns as part of their underwriting. Ultimately your goals or needs may be best served by a bank loan, perhaps because of the structure of the loan, the pricing, or on restrictions imposed upon the property in conjunction with certain Agency loans.
The Bottom Line
The goal for any investor is to get a loan that provides the best value and meets their needs. But the best value loan for one investor might not be the same for another. It really depends on the property, the credit quality of the borrower and its principals, and the amount of leverage an investor needs. A commercial real estate lending, investment, and advisory firm such as Greystone can assist you in evaluating the various financing solutions available and can help you navigate through the process to secure the best available funding for your multifamily needs.