Multifamily Financing: All You Need to Know

Investing in multifamily properties is one of the most profitable real estate strategies that you could implement. The high cash flow that these income properties generate coupled with their potential for passive income makes them the perfect option for experienced and novice real estate investors alike. But before you can think about buying multifamily homes, you must first explore all the financing options that are available to you. This is precisely the topic of this article. Keep reading as we breakdown every aspect of multifamily property financing and outline a few simple steps on how to secure multifamily financing.

Multifamily Financing Options

Financing a multifamily property can be done in several ways. Some of these methods are simple whereas others are more creative. Here is a brief look at the main options for investing in multifamily homes that are available to you.

1- Conventional mortgages

This is the most common type of financing for residential real estate. These mortgages are ideal for multifamily investors and house hackers alike. As their name implies, these loans conform to Fannie Mae and Freddie Mac rules and obtaining them is predicated on meeting a wide range of conditions.

multifamily financing loan

Here are the main requirements for this type of multifamily financing:

For a primary property, the down payment for a duplex is 15% and 20% for a triplex and fourplex. As for multifamily real estate investing, the minimum down payment for rental property is 25%.
Fannie Mae and Freddie Mac set the minimum credit score for multifamily lending at 620.
The debt to income ratio for conventional investment loans caps at 50%.

2- FHA multifamily loan

These are loans that are provided by FHA-approved mortgage lenders. While these loans are mostly destined for low-income Americans, certain real estate investors might be able to qualify for them for properties of 2 to 4 units. That is, if they implement the house hacking strategy. Moreover, FHA mortgages tend to have lower closing costs and require very little down payment. Here are the main FHA multifamily mortgage loan requirements:

You will have to live in one unit of the property for at least a year.
You need a credit score of 580 when buying multifamily homes of 2 units.
For multifamily homes of 2 to 4 units, you need to maintain a low debt to income ratio and a credit score of at least 620.
Your down payment can be as low as 3.5%.

3- HUD multifamily financing

Much like FHA loans, HUD loans are insured by the government and their terms are quite favorable. But unlike FHA mortgages, HUD loans are exclusively designed to accommodate multifamily investors and developers. When buying multifamily homes for investment, you should meet the following criteria in order to obtain a HUD loan:

You need to have a strong financial standing as well as a demonstrable experience in real estate investing.
The minimum loan amount for purchasing or refinancing is $1 million.
You will have to go through annual operational audits.

4- Private money financing

If you were wondering how to buy a multifamily property with no money, then private money financing is an option worth exploring. These are loans that you can obtain from private entities that are not affiliated with any financial institutions. As you would expect, the requirements and terms of these loans vary widely from one lender to the other and there is no set rule on how to get the ideal financing package. Still, most private money lenders will be more willing to offer you decent multifamily financing rates if you invest in a top property that is capable of generating high cash flow.

Let’s now delve into how to get financing for multifamily investment in a few simple steps.

How to Obtain Multifamily Financing

To ensure that your multifamily financing goes smoothly, you need to follow these simple steps.

1- Identify a profitable investment property

The first step of securing multifamily financing is finding an investment property that mortgage lenders would approve of. If you are asking yourself the question « how can I find multifamily homes for sale near me?» then you should look no further than Mashvisor. First, you can use the Property Finder to zero-in on the best multi-family homes for sale. This tool’s advanced AI technology and machine learning algorithms enable it to find investment properties that match your criteria in a matter of minutes.

Next, access each listing’s property calculator and conduct an in-depth investment property analysis. This will allow you to assess the potential of these properties and eliminate those that are less likely to generate a profit.

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2- Showcase your track record and financial standing

Contrary to common belief, lenders look at more than just cash flow when issuing multifamily financing. In fact, having a good credit score and a proven track record of profitable real estate investments will increase your chance of securing competitive multifamily mortgage rates. Here are some of the documents that you should consider submitting to your lender:

An investor résumé that summarizes all your skills and details your past experiences in the housing market.
Tax returns
A list of your assets and liabilities

3- Submit a Pro Forma

A Pro Forma is a document that outlines the projected cash flow and expenses of an investment. Submitting one to your lender is the best way to highlight the effectiveness of your real estate investment strategy and prove that you are an ideal borrower. In fact, investors who can showcase an ability to turn a profit will invariably get low multifamily loan rates as well as quick processing times.

The Bottom Line

Securing multifamily financing and getting good investment property mortgage rates is easily achievable once you get a good grasp of all the options that are available to you. As long as you opt for a profitable property and showcase a good financial history, you should be able to get a loan in a timely manner.

In the meantime, check out our blog to learn some more valuable tips.

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