Purchasing a multi-unit building is an option more and more investors are considering to be a savvy business opportunity.

img

When it comes to investing in real estate, buyers have a number of options. Purchasing a multi-unit building is one option for real estate investing, and it’s an option that more investors are considering as a savvy opportunity. Funding this purchase is possible with a multifamily loan.

What Is a Multifamily Loan?

A multifamily loan is a funding option for purchasing a residential structure with four or more housing units. If you are thinking about investing in real estate, you may want to look into this loan option, as it could allow you to generate passive income and build your own personal wealth. Lenders may vary on what constitutes a multifamily home, as some consider properties with five or more units to be commercial real estate. Obtaining commercial financing is typically more challenging, and the loan may have shorter repayment terms and require a larger down payment than a residential loan.

Types of Multifamily Financing

Similar to other loan options, multifamily funding isn’t one size fits all. You can choose from several multifamily investment opportunities, depending on whether you plan to live in one of the units or rent them all out. There are four main types of multifamily loans: conventional, government-backed, short-term, and portfolio. Understanding the differences between the loan types and what they’re designed for can help you make a more informed decision as you move forward with your investment.

Conventional Multifamily Mortgage

A conventional multifamily mortgage is similar to a traditional mortgage loan that a borrower would request to purchase a residence. The terms are essentially the same, typically with 15- or 30-year repayment terms and offered by traditional lending institutions and banks. They adhere to the Fannie Mae qualifications for mortgage loans and maximum amounts. You can qualify for the loan when purchasing a housing structure with two, three, or four individual housing units.

The loan limit is one of the differentiators between a conventional multifamily loan and other multifamily loans. Limits vary based on regional housing prices. The borrower on this type of multifamily loan will typically have to pay 20% of the purchase price as a down payment. Similar to traditional mortgage loans, the interest rates fluctuate for conventional multifamily mortgages. In order to qualify, the applicant must be planning to purchase a multifamily property with between two and four units, have at least six to 12 months of cash in reserves, and have a high credit score.

Government-Backed Multifamily Mortgage

Freddie Mac and Fannie Mae sponsor the government-backed multifamily mortgage options, which are ideal for investors who plan to live in one of the units and rent the others. As the name suggests, the loan is backed by the U.S. government and meets the standards set forth by the Federal Housing Administration (FHA). You can choose from five different financing options, including loans for structures with between two and four units and five units or more. The minimum loan amount for a 5+ unit property is $1 million, and no maximum loan amount applies.

One example of a government-backed multifamily mortgage is known as FHA 223(f), which is designed for apartment buildings and can finance up to 87% of the loan-to-value of a property. Loan limits for FHA loans vary based on regional home prices and the type of property in question. The borrower may be subject to private mortgage insurance, depending on the terms of the loan and the amount of the down payment available. Each mortgage-backed multifamily loan type has its own eligibility requirements.

Short-Term Multifamily Loan

Hard money loans for multifamily properties fall under the short-term loan category. A hard money loan is a short-term, interest-only loan that is typically used to purchase and renovate a distressed property. If you are considering purchasing a multi-unit housing property to flip and resell it, a short-term multifamily loan may be the best option for you. Bridge loans also fall under this category and are designed to bridge the gap between a period when the borrower is waiting for long-term financing or selling a property.

An investor who wants to season, increase the occupancy of, or renovate a multi-unit property may benefit from a short-term multifamily loan. The interest rates are higher than other types of multi-family loans, but the repayment terms are typically much shorter, falling between six and 36 months in most cases. An advantage of this loan type is a shorter funding timeline, as a short-term loan can fund in as few as 10 days.

Portfolio Multifamily Loan

A portfolio loan is a less conventional option for obtaining funding for a multifamily property. The property you plan to purchase with this type of loan must have at least two units to qualify. The terms of a portfolio multifamily loan can fall between three years and 30 years. This type of loan is designed for investors who need more flexible terms or want to finance multiple properties at the same time. An investor could use a portfolio loan to finance up to 10 different properties.

The minimum loan amount for a portfolio multifamily loan is $100,000, while the maximum varies by lender and depends on the number of units in the structure. A minimum of 3% of the property value is required as a down payment. Lenders that offer portfolio loans have more flexibility in underwriting guidelines, providing more options to investors who qualify. Most lenders who offer this option focus more on the property’s performance than the personal financial situation of the borrower.

If you are thinking about investing in multi-unit real estate properties, a multifamily loan can help you achieve your goals and start earning passive income as you collect rent from your tenants. Titan Funding has financial professionals to help you, including lending experts who can help answer any questions you might have or provide you with additional details about what loan options are available to you, based on your unique situation. We specialize in providing total capital solutions for our clients, and our partnerships with many leading financial institutions allow us to help you achieve your investment goals.

    Ready to get started?

    Simply complete and submit this short form and a Titan team member will contact you to discuss your investment needs.