Beginners Guide to Multi Family Loan

Real estate investors can arrange for funds from many sources depending on the type of property they are investing in. If the property is a multifamily project, then you will need to arrange a much higher loan than regular loans. This is why financial institutions designed multifamily loans to help real estate investors add multifamily properties to their portfolios. Various multifamily lenders can provide multifamily property loans, including banks, commercial lenders, credit unions, and private investors. However, platforms like Simplending also offer loan products like multifamily bridge and multifamily term loans. Such financing options make it a lot easier to invest in multifamily properties. If you are new to multifamily loans, this beginner's guide is for you. Here we explain the basics of multifamily loans, the features of multifamily mortgages, and their advantages.

What is a Multifamily Loan?

A multifamily loan is a type of financing designed for acquiring, refinancing, constructing, and rehabilitating multifamily properties. Any property that has more than one residential use is termed multifamily. It usually includes apartment buildings, townhouses, and condominiums. However, some multifamily lenders only provide loans for assets with five or more family units, restricted to those with five or more units. Usually, for a multifamily loan, you need to provide a lien on the property for security, and some lenders may also ask for additional security, such as personal guarantees. Such loans can have a term anywhere from 6 months to 40 years or more, which makes them suitable for high-amount lending. However, you must be careful about terms and conditions as these loans are not always straightforward and can vary significantly from lender to lender.

Types of multifamily loans

You can avail of several types of multifamily loans, so you need to be aware of the kinds. Multifamily financing can be categorized based on the type or the specific purpose of the loan. Here is what you need to know to ensure that you are applying for the right loan for multifamily property.

Multifamily loans by term length

 

Permanent Loans

Permanent multifamily financing is usually available for refinancing or purchasing property. They have a repayment time period of 20 to 30 years and can have floating or fixed interest rates. Agency loans are an example of permanent financing options. Also, long-term bank and credit union loans are the same.

Short-term financing

Although few, there are short-term financial options also available for multifamily properties. However, due to their short tenure, these loans are typically more expensive due to higher interest rates and fees. A short-term multifamily loan has terms ranging from six months to two years. If you are wondering why short-term multifamily financing is needed, it is for acquiring or developing a property on short notice.

Multifamily loans by purpose

Based on what the multifamily loan is approved for, it can be classified as one of the following types.

Acquisition loans

When you are using a multifamily loan to purchase a multifamily property, it is termed an acquisition loan. Such loans can be permanent, long-tenure, and short-term bridge loans such as multifamily mortgages. If the property is at an unstable stage of its life, it will be difficult to get permanent acquisition loans.

Refinancing loans

They are simply refinancing loans you would avail of for any other property. When you need to refinance existing debt on a multifamily property, you can ask multifamily lenders for refinancing loans. There are several reasons to consider refinancing loans, such as to take advantage of better interest rates. Also, if the property occupancy increases over time, you can apply for refinance loans at better rates.

Construction loans

As the title suggests, construction loans are used to fund a multifamily property's construction. They are interest-only loans offered for six months to two years. However, not all construction loans are short-term. For instance, the Department of Housing and Urban Development's HUD 221(d)(4) multifamily construction loan can have terms of up to 43 years.

Bridge loans

Bridge loans are used to fund the purchase of a property before the closing of a permanent loan. They are short-term loans and typically have a term of six to 12 months. Multifamily Bridge loans are excellent options if you need to arrange for funds quickly to close a loan for an acquisition.

Pros and Cons of Multifamily Loans

 

Pros:

Low risk in the multifamily property sector results in lower interest rates compared to same-value properties in other sectors. Multifamily loans have a long tenure of 5 to 40 years. The terms are flexible because there are so many types of multifamily loans. A loan for multifamily property typically allows for higher LTV ratios than loans for other commercial real estate properties.

Cons:

Most multifamily loans have prepayment penalties. Some types of loans require the borrower to have a certain amount of cash reserved.

Conclusion

A multifamily loan is a great option to add valuable properties to your investment portfolio. However, know everything about such loans before you approach multifamily lenders.