Many investors in recent years have shifted from acquiring residential real estate — one to four units — to the multifamily space, which is defined as five or more units. Some reasons for this transition to apartments include a potential for higher returns, the economies of scale offered by the asset class and perhaps increasing sophistication on the part of your clients.
To be prepared to enter the apartment sector, residential mortgage originators should be aware of some fundamentals. Those include knowing which assets qualify for multifamily loans, who is eligible to borrow and what documentation the borrower needs to provide to ensure a successful acquisition or refinance.
For clients, investing in multifamily properties offers the potential to produce higher returns than single-family residences. Although the barriers to entry are higher in the commercial-property sector, a multifamily acquisition enables investors to expand their portfolios at scale while streamlining operations. It is, after all, easier to look after one large roof than 20 small roofs spread across town. r_2018-09_Read_spot
For mortgage originators, the ability to offer options for financing multifamily properties will open the avenue to earning more per transaction. By becoming literate in the multifamily finance sector and learning about apartment-market trends, you will compete at a higher level and position yourself as an expert in the space for residential borrowers entering the multifamily market.
Borrowers have several options when the time comes to selecting a lender. Different types of financing can offer advantages and disadvantages. While banks may provide more aggressive interest rates, for example, they may require recourse loans and also demand a lower loan-to-value (LTV) ratio.
Agency lenders, on the other hand, can often offer loans on a truly nationwide basis at higher LTVs that are nonrecourse — which means the borrower cannot be held personally liable in the event of a default. Select agency lenders also often process applications more quickly using new technologies and offer more flexibility than their competitors in the banking sector.
It is easy to determine if a particular multifamily transaction qualifies for commercial mortgage financing. There are some additional factors to consider, however.
In order to have a good shot of being considered for a conventional loan for a multifamily property, the mortgage request normally must be for more than $1.25 million for an acquisition and more than $1 million for a refinance. For a property to be eligible for a multifamily loan, the purchase should consist of more than five units per building, and the buildings should be contiguous.
“ Always let your lender know upfront about any issuesthat could cause a potential problem. ”
Typical apartment loans require occupancy rates of at least 85 percent to 90 percent for the three months prior to your mortgage application or closing. If it’s an older-vintage asset, then ensure that it has been well-maintained and kept clean. Conventional mortgages typically only finance properties that do not need substantial rehabilitation or renovation. Therefore, another consideration for your clients to keep in mind is that the property is in good condition prior to seeking financing.
Be aware of whether the property is subject to a Housing Assistance Payment contract (HAP) or some other affordable-housing contract. Affordable-housing contracts are agreements with the U.S. Department of Housing and Urban Development (HUD) and pertain to buildings that provide rental assistance to low-income individuals and families. A HAP contract, in particular, is used to provide Section 8 rent assistance to tenants under HUD’s housing-choice voucher program. Buildings subject to such contract requirements are eligible for different types of financing, but they are generally not eligible for conventional multifamily loans.
In addition to restrictions on the types of assets that are available for conventional multifamily financing, potential borrowers also must meet certain qualifications in order to have the best shot at receiving financing for an eligible property. That means, as a mortgage originator, you need to vet your borrower.
Does the borrower have experience owning apartments? While it is not impossible for a first-time multifamily owner to receive a loan, experience definitely helps with the application process here. Ideally, the owner will have had experience owning properties of similar size or bigger — and in the same market. Another determinant factor in the loan process is the borrower’s net worth, which should equal to or exceed the loan amount requested.
Does the borrower have at least nine months principal and interest in cash on hand or marketable securities? Nine months of the annual debt service (principal and interest) usually comprises about 7 percent to 8 percent of the loan amount. This amount in cash on hand or marketable securities must be available to the borrower pursuing the loan. Marketable securities refer specifically to nonretirement investments. Retirement investments, unfortunately, are not considered.
You’ll also have to confirm that the borrower does not have any history of bankruptcy, foreclosure or deed in lieu. A borrower will ideally have a clean financial record and adequate credit scores — with a credit score above 650 to 680.
As with the financial history, a borrower also should confirm that he or she is not currently involved in any legal proceedings involving the asset or borrowing entity while seeking a multifamily loan. If the borrower is involved in a lawsuit, some situations are eligible for a waiver for acceptability on a case-by-case basis. Always let your lender know upfront about any issues that could cause a potential problem.
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Acquiring a multifamily property for the first time can be an exciting experience for both the borrower and the mortgage originator handling the transaction. For residential mortgage originators, if a client asks about buying or refinancing an apartment building, having the necessary information on hand, and the right relationships with lenders, will allow you to up your game and achieve a new level of accomplishment in your career.