How to Finance Multifamily Properties
Real estate investment is a lucrative business. It’s so lucrative, in fact, that many companies go into real estate investment after a point because it provides a stable investment with good income prospects that allows them to make money with cash reserves while improving the overall value of the business. Before you move into investing in multifamily properties, though, it’s important to understand the risks. It’s also vital that you understand how financing apartment buildings differs from financing smaller rental properties.
Typical residential rentals with between one and four units are usually handled much like traditional home mortgages when borrowers seek to finance a purchase. Even though they are income-producing properties, their values are usually low enough that banks don’t have a problem lending money for their purchase along the same lines, using personal income and credit from a buyer. When it comes to buildings with five units or more, though, the loan approval process starts to resemble that of a business loan approval.
For typical multifamily rentals, this means the bank will consider the borrower’s personal income and credit, as well as the operating receipts from the business for the last two years. These records include the rental rolls, so the bank will be able to calculate how much income is coming in and what percentage of that income will be needed to service the debt. This helps them adjust the amount of credit that can be extended, affecting the loan to value ratio for the loan.
Purchasing mixed-use property is even more like commercial loan approval, with the building income and costs for maintenance and operation taking center stage over the personal income and credit of a single buyer, even if the sale is to a single buyer. This is typically because the amount of personal income needed to sustain a mortgage on a large building is larger than most individuals can support on their own income and credit.
The best way to buy multifamily properties is to figure out how to put together a down payment that allows you to ask for a lower than maximum LTV, and to choose your property carefully. If you can’t buy a property that has a robust enough rental population to meet the needs of long-term financing at first, you can also consider going with short-term financing to cover the costs of closing and renovation, but that financing is typically offered with an understanding that the building will become close to full soon, and that it will then be refinanced. This allows you to rehabilitate older buildings quickly, if you have the right plan.