There is no doubt that securing financing for a multifamily investment is complicated. Apartment investments are higher risk than a standard home mortgage, so borrowers need to have a higher equity stake in the property and the stamina to undergo a more rigorous underwriting process.
But, the good far outweighs those discomforts. In the commercial lending world, apartments are considered the darling of commercial assets—and many lenders have dedicated financing options and loan products available that fit a wide range of borrower needs. Here are our top five multifamily loans for your next deal.
Together, Freddie Mac and Fannie Mae own a tremendous share of the multifamily origination market. The two agencies provided more than $148 billion in multifamily financing loans in 2019, making them the most popular loans for multifamily investors and one of the best financing options for middle market apartment investors.
Freddie Mac Multifamily’s Optigo program provides conventional and small balance apartment loans as well as financing for targeted affordable housing and senior housing. Borrowers can secure a loan-to-value of up to 80% for apartment investment properties larger than five units. The small balance program provides loans of up to $7.75 million, while the conventional program provides $5 million to $100 million loans with fixed-rate, floating-rate and value-add products available.
Fannie Mae provides multifamily loans for as little as $750,000 for apartment investments with terms of up to 30 years. The agency has conventional financing structures as well as specialty financing for niche asset classes, like student housing, senior housing and green remodels.
In addition to agency loans, traditional banks originate balance sheet loans for apartment investments. These loans—as the name implies—stay on the bank’s balance sheet, and the bank manages due diligence and the terms. As a result, the terms can vary widely from bank to bank; however, borrowers should expect a minimum 20% down payment. Bank balance sheet loans are also typically full recourse, which means the borrower is personally liable for the balance of the loan beyond the pledged collateral, in this case the property. While that creates more risk for the borrower, it also mitigates some risk for the bank and can be a pathway to qualify for financing.
Life Insurance Company Loans
Life insurance companies have become a major player in the commercial debt markets. While life company loans were once reserved for institutional borrowers, they are now available to a broad spectrum of borrowers and are considered an alternative to the agencies. Like agency loans, they are non-recourse with standard carve out terms and competitive interest rates; however, life company loans generally have a $2 million minimum loan size with a 75% maximum loan-to-value. Life companies also target quality real estate, so niche multifamily investors, like those investing in tertiary markets or affordable properties, might have a harder time securing financing.
Commercial real estate investors—those buying retail, office and industrial properties—are generally the audience for CMBS loans, but in the last year, CMBS popularity increased substantially for multifamily borrowers. In fact, CMBS multifamily issuances doubled in 2019 over the previous year to $12 billion, and it isn’t hard to see why. CMBS loans have a lot of benefits: they are non-recourse; have long terms of up to 30 years; have competitive interest rates; and they have flexible underwriting and loan-to-value requirements, making this an attractive option for borrowers that might not meet more conventional loan standards. However, it isn’t all sunshine. CMBS has been criticized for its servicing issues. Once the loan is securitized, a third-party known as the master servicer services the loan. The master servicer has relatively little authority to modify the loan outside of the original terms. If for any reason there is a problem with the loan—say, for instance, there is a global pandemic and the asset’s cash flow decreases—the loan goes into special servicing automatically and is considered distressed.
Hard Money Loans
Hard money loans are a short-term alternative and non-traditional financing option for borrowers that need immediate access to capital and flexible loan terms. Borrowers secure hard money loans to bridge a financing gap and then refinance into a more conventional mortgage, usually within three to five years. The funding can be available within days, but the cost of capital is much higher than a traditional loan. Borrowers shouldn’t be surprised to see rates as high as 12% to 15%. Despite the cost, there are a handful of reasons why hard money loans play a crucial role in the capital stack. Investors buying a distressed asset or a bank sale might need in-hand proceeds to secure the deal, or investors playing in the value-add space might need a bridge loan to acquire a property that might not meet the standards of a traditional bank. If you are looking at hard money loans, a word to the wise: hard money lenders operate beyond regulatory purview, so do your due diligence before striking a deal.
If your cash reserves don’t fit the financing requirements above, there is still a wild card to play. FHA loans can serve as an affordable entry point into apartment investment. FHA lends on owner-occupied properties of up to four units. So, if you buy a fourplex with an FHA loan, you would occupy one unit and rent the remaining three. You do have to live in the property for a minimum of two years before you are able to move and rent the remaining unit, and you have to pay mortgage insurance—which can be a steep fee. On the upside, these loans require as little as 3% down and are available at very attractive rates. For the right property and borrower, FHA is certainly an option to start your apartment portfolio.