As mentioned previously, there are many ways to financing a multifamily property. If your credit is good (if you are an investor I hope that it would be good) then the traditional financing methods are going to work the best. But let’s look at some different ways to finance a multifamily property.
The Blanket Loan
This one I especially like. This is the way we financed the latest 4 unit deal that we did. It was two duplexes on two different streets, but the loan was for one sum of money, and included both properties. The loan includes a balance point that will release title to one of the properties when reached. This is significant because it reduced our financing costs. One loan means one set of closing costs, one application fee, etc. One more note I need to make here is the importance of establishing relationships with bankers. In our case, we have started a good relationship with a local bank vice president, who will be able to help us in the future. He didn’t charge us any origination fees, and our closing costs were minimal.
Many times, if you are operating under a corporate name, LLC, or some other business entity, the commercial loan is going to be your easiest option. The commercial loan will allow you to borrow money in the name of your business, and put your business’ name on the deed to the property. It is usually a fully amortized loan, but generally has a shorter maturity than a traditional mortgage. I usually see something like a 5 year maturity (which can be renewed at the then market rate of interest) with a 10, 15, or 20 year amortization schedule. So the payment will be a little higher than a traditional 30 year mortgage, but the financing is much easier to obtain, and again, you can put it in the name of your business.
Traditional 30 Year Mortgage
You can go out and get a traditional mortgage, but the rate for an investor loan is going to be higher, and getting approved for the loan is more difficult. Further, investor mortgages are going to be in your name, exposing you to greater risk. Also, mortgage companies have limits on how many loans you can have in your name, so at some point, you will not be able to buy any more properties. The advantage is, you can get the 30 year amortization, make a smaller monthly payment, and pocket more of the difference between your rental rate and your payment.
Adjustable Rate Mortgage (ARM)
Getting an ARM is an option, but frankly, not a very good one when you are looking to invest for the long term. Especially with rates as low as they are in today’s market, I would stick more to a fixed rate mortgage. The ARM really only has merit if you are looking for a short term mortgage, with the intent to sell the property before the initial interest rate period expires.
Hard Money Lenders
This is what I like to call the wild west. Anything goes here, and it is all about relationships. If you are just getting started, expect to pay quite a bit more in interest and fees when using hard money, but develop a relationship with an investing group, as it will pay off later. Once they do a couple of deals with you, they will be more inclined to offer you better rates and fees.
In closing, there are many different ways to finance a multifamily property. But the important thing is, and what I want you take away from this is that it is all about relationships. You must get out there, meet some people in the business, get to know them, and start small. Do one small deal to test, and let them gain a comfort level with you. As you go down the road, your deals will become much more profitable, and your relationships may even send deals your way.
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