Commercial multifamily (5 or more units) investing is becoming increasingly popular through the rise of social media and podcasting. Other commercial real estate sectors like office and retail are experiencing difficulties which drives more traffic to multifamily.
Multifamily is a scarce resource in my opinion. Unless people decide they want to live outside in the woods, there is going to be strong demand in the future. So, for new people jumping into the space, let’s talk about financing these properties.
Two Things Lenders Look At
I receive a flood of inquiries every week about getting a loan on multifamily properties. The inquirers sometimes hear online that you do not need a credit score, or other things required for a traditional single-family mortgage.
This is true, but what the online gurus often fail to mention is you need a high net worth. This is more challenging for someone starting out than getting a single-family mortgage.
1. Sponsorship
If you want a loan of $10 Million, then you will need a net worth of $10 Million or greater. You will also need 10% of the loan amount in liquidity. In this case, $1 Million liquid.
The other piece of qualifying for a commercial mortgage is experience. The person or sponsorship group signing on the loan must have experience owning and operating multifamily. This does not mean passive multifamily investments.
What a lender will want to see is that you have bought a similar size multifamily property. For a $10 Million loan in Dallas-Fort Worth that is roughly 100-units. The lender will want to see that you have bought and sold similar size properties.
They do not care if you built a successful construction company or IT company, etc. They only look at multifamily properties where you were a managing member or loan guarantor of a multifamily property that sold successfully.
Experience is considered someone who has successfully bought and sold two to three or more multifamily properties. They like to see current multifamily properties under management as well.
New entrants into the business often do not qualify for a commercial mortgage despite what they hear online. They must partner with someone that has net worth and experience.
Or if they have enough net worth, they can use some starter loans through a bank or a Freddie Mac Small Balance Loan.
2. Property
The reason a commercial lender will look at financing a multifamily property is cash flow. Lenders underwrite the property and look at how it is performing. This is also why a lot of investors look at multifamily properties.
The more history you know about the property, the easier it is for a lender to make a credit decision. They also look at the market and submarket where the property is located.
If the property is located in an area with high crime, the more difficult it will be to find financing. One of the first due diligence items some lenders do is a quick google search to see if there were any shootings on a property.
The lender will do a Net Operating Income or NOI analysis. This shows how much cash flow is available for debt payment. Then the lenders can work backwards from there to see how much loan proceeds they are willing to lend.
Overall, property condition, location, occupancy, and cash flow are how lenders make credit decisions on multifamily assets.
Read More: 5 Types of Loans for Multifamily Financing
Conclusion
There are two things lenders look at when deciding to loan on commercial multifamily properties. One is the sponsorship group. Does the group combined have a total net worth equal to or greater than the loan amount? Does the group have 10% of the loan amount in liquidity? What is their experience level?
A lot of people partner in the multifamily industry to meet this obligation. Two, is it a good property, in a good location, that is cash flowing? Nicer assets that are better located have an easier time obtaining financing and at better rates. Lower quality assets in difficult neighborhoods can be more challenging and options may be limited.
Once you understand these two fundamentals of a commercial multifamily mortgage, you can assess what skills or qualifications you can provide to enter the business.
