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Our essential guide to multifamily financing will help both beginners and experienced investors. So, if you are new to real estate investing or have experience with single-family rentals this guide can help you.

According to Bigger Pockets, the current nationwide affordable housing crisis with rising home prices makes this an ideal time to invest in multifamily properties.

However, to successfully invest in multi-family rentals, you must understand multifamily financing.

Multifamily Financing

What is a Multi-Family Property?


Multifamily properties are known as “multi-dwelling units (MDU)”. This is a building or a house composed of two or more units. Situated on the same parcel of land the property has a common title.

In the world of financing, a residential property consists of two to four units. The commercial property consists of five or more units.

The difference between a commercial and residential property is important when you apply for financing.


What to Look for in a Multifamily Investment


Multi-family property investors focus on three features:

  • Capitalization rate;
  • Net operating income; and
  • Cash flow.


What is Capitalization Rate?


We could spend an entire blog post explaining the Capitalization Rate (CAP) and how it related to the Return On Investment (ROI) Rate.

Luckily, we already published a blog post titled: “How to Understand CAP and ROI Rates”. You will quickly learn everything you need to know about CAP and ROI Rates.


How to Get Multi-Family Financing


We mentioned above, that financial institutions differentiate between multifamily commercial and residential properties based on the number of units. The types of available financing and requirements to qualify, differ between these two types of properties.

Generally, to get conventional financing you can look at the same sources available for single-family rentals. In addition, other sources are available exclusively for multifamily properties.

First, let’s explain conventional loans before explaining non-traditional options including creative ways.


Residential Multi-Family Financing


Residential Multi-Family FinancingInvestors can buy residential multifamily properties by applying for conventional mortgage loans similar to ones for single-family residences.

If you plan on living in one of the units, “owner-occupied” properties give you more options. These options include:

  • Conventional financing;
  • Federal Housing Administration (FHA) loans; or
  • Veterans Affairs (VA) loans.


Commercial Multi-Family Financing


Commercial real estate loans require larger down payments on a shorter repayment schedule.

Yet, the larger the loan amount for a multi-family project opens up opportunities with more financial institutions. Some lenders specialize in multi-family financing. Large financial institutions often have departments focusing on these types of loans.

Bigger loans mean higher fees for the lender which works to your advantage. Quality multi-family property investments attract more lenders giving you a VIP treatment.

Commercial multifamily loans usually start at $500,000 and up to tens of millions of dollars.


Fannie Mae Multi-Family Loans


Multi-Family and apartment buildings can obtain financing through Fannie Mae who describes itself as: “Our mission is to facilitate equitable and sustainable access to homeownership and quality affordable rental housing across America.”

Regarding Multi-Family properties: “Fannie Mae is a market leader for financing multifamily properties.” Fannie Mae defines multi-family properties that have “five or more dwellings within it”. In 2019, Fannie Mae facilitated over $8.1 billion in multi-family real estate loans.


Fannie Mae Delegated Underwriting and Servicing (DUS) Program


The Fannie Mae DUS-MBS multi-family loan program offers loans to buildings with up to 35% as commercial tenants but capped at 20% of the rental income. DUS loans require a large military population of up to 80% occupancy. If this population goes over 80% you must apply for the Fannie Mae Financing for Military Housing program.

San Diego hosts a high number of military personnel. View our blog post titled: “Investing Near Military Bases Makes Sense In San Diego”. This post lists all 7 military bases and depots in San Diego where over 100,000 active-duty military personnel live in San Diego with most renting.

SoCal Lifestyle Realty can help you locate multifamily investments near any of the 7 military locations in San Diego. Contact SoCal where one of their experienced Realtors will advise you about the best investments for renting to military personnel.


Fannie Mae Multifamily Commercial Loans


Two loan programs for multifamily properties are available through Fannie Mae.


1. Fannie Mae Standard Multifamily Loan Program


A minimum loan amount of $750,000 is available for commercial multifamily loans. You can leverage a maximum of 80% of your Loan to Value (LTV) allowance. This loan requires:

  • Non-recourse availability written into the agreement;
  • Five-to-30-year fixed rates term;
  • 30 years amortization;
  • No debt-to-income ratio;
  • A minimum credit score of 680;
  • Your minimum net worth is equal to the loan amount requested; and
  • You must have a minimum 1.25  Debt Service Coverage Ratio Calculator (DSCR).


2. Fannie Mae Small Loan Program


This streamlined loan program lowers the fees for buying and refinancing apartment complexes ranging from $750,000 to $3 million. In a major city, the amount can go up to $5 million. Here are the loan incentives:

  • Up to 80% of the loan to value is available to you;
  • No tax returns required;
  • The loan is assumable for a 1% fee;
  • The loan amortizes for 30 years; and
  • Your maximum commercial space is 35% of total rented space or 20% of gross income.


Options for Unconventional Financing Multifamily Properties


Options for Unconventional Financing Multifamily Properties

Three options are most popular for unconventional financing:


1. Real Estate Syndication


Basically, a real estate syndication pools funds from different investors to provide financing for investment properties. Two types of syndications exist:

Real Estate Crowdfunding – This allows you to invest with a little money and earn passive income with no responsibilities. Or, don’t invest any money and be the manager of the investment.

Real Estate Partnership – Each partner receives a percentage share in the equity and the return when the property sells. The partnership may also allow a partner to exit the investment when bought out by the other partners (or a new partner).


2. Equity Share Investors


Basically, a real estate investor owns equity in the multi-family property in return for providing the funds for the purchase. This includes a percentage of the monthly cash flow. Likewise, when the property sells, a percentage of the profits.

Equity shares investors do not take part in the decision-making aspects of the investment as partners are normally entitled.


3. Multi-Family Short-Term Loans


Either bridge loans or hard money loans where the financing is for a short-term (typically ranging from six to 36 months) where the payments are based on interest only. The principal gets paid back when the loan term ends.

Often, investors seek short-term loans when the multi-family property needs fast cash for improvements necessary to obtain a permanent multi-family loan.

Sometimes, the investor gets a short-term loan to buy the property when the investor is trying to meet permanent financing personal qualifications.


 The Essential Guide to Multifamily Financing – Conclusion


Now that you viewed our essential guide to multifamily financing, put it to work. Why? Because the current national affordable housing crisis and increasing home prices make this the perfect time to invest in multifamily properties.

Experienced multifamily investors know how to calculate:

  • Capitalization rate;
  • Cash flow; and
  • Net operating income.

Our guide points to past blog posts to help you make these important calculations.

After reading about residential multi-family financing, you learned the difference between “residential” and “commercial” loans.

Unconventional financing includes:

  • Real Estate Syndications (like partnerships and crowdfunding);
  • Equity sharing; and
  • Short-Term loans.

Better yet, Fannie Mae Multi-Family Loan Programs like:

  • DUS multi-family loan program for military renters;
  • Standard multifamily loan program; and their
  • Small loan program.


Interested in Multifamily Investing and Financing in San Diego?


Multifamily Investing

WeLease Property Management services San Diego County with all your landlord needs no matter how big or small your rental properties.

Contact us to learn more about multi-family financing options in the greater San Diego area.


Steven Rich, MBA – Guest Blogger



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