Updated: Mar 7
You’ve found an ideal multifamily property, located in a strong real estate market and you have investors lined up so you can move on acquiring it. You probably have contacts at various lenders that you plan on contacting in order to get the financing handled. But before you begin exploring the best financing options, there are some things that you need to know about multifamily financing. In addition, due to the fact that the country is currently in a recession due to the pandemic, financing is harder to get. The good news is that lenders are still lending money.
To begin with, there are multiple financing options available to you. In addition, there are ways to qualify for financing that you might not know about. Also, during a pandemic, like COVID-19 that we’re experiencing now, financing is different. I’m going to take you through these key points to provide you with everything you need to know about multifamily financing.
There are Three Types of Financing
Type 1: Agency Loans
For multifamily properties, there are three types of financing available to you. The first is agency loans, which include Fannie Mae and Freddie Mac. When it comes to Fannie Mae, the most popular loan is the Fannie Mae DUS. These loans start at $3 million, and there is no upper limit on how much you can borrow.
Both of these loans are popular because they offer competitive terms and are non-recourse (which means that if you default on the loan, the lender cannot take your other assets as collateral, with some exceptions). Most loans are assumable with lender approval and interest-only payment options are available. The loans feature amortizations over 30 years, and also have 45-day closings.
Pre-COVID-19 era, agencies were lending for 3%-3.7% interest rates, 65% to 75% loan-to-value (LTV) for 25-30 years, and required 1.25x DSCR (debt to coverage ratio, which is the ratio between the Net Operating Income and the loan payment). Nowadays, agencies are lending at 65%-75% loan-to-value and 3.3%-3.8% interest rates. DSCR has increased to 1.35x to 1.55x, which means that loan proceeds are much lower than they were, which impacts returns. Another change today is lenders' requirement from borrowers to allocate 12-18 months of debt payments as an upfront reserve.
Agency loans look at the investor as to their liquidity and net worth. If you’re borrowing $5 million, for example, they’re going to want to see a net worth of $5 million. As for liquidity, they want to see that you have the ability to pay 9 to 12 loan payments in order to get approved. If for some reason you don’t have the net worth and liquidity to qualify, you can partner with an individual who does have the liquidity and net worth, and they can sign on the loan.
Type 2: CMBS Loans
CMBS stands for commercial mortgage-backed securities. This type of loan is a commercial real estate loan that is backed by a first-position commercial mortgage. CMBS loans are packaged and sold by Conduit Lenders, commercial banks, investment banks, or syndicates of banks.
These loans are secondary loans to the borrower, as they are not recorded on the books of a lender. This allows the lender to maintain their liquidity. The advantage of a CMBS loan is that it is non-recourse, eliminating any personal liability to the borrower. The loans have fixed interest rates along with terms of 5 and 7 years, with 10 years being the maximum term length.