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.
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.
Getting started
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.
Other variables
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.
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.
Misty Read is a director at Hunt Real Estate Capital, where
she is focused on Fannie Mae and Freddie Mac originations,
primarily for the company’s Small Balance Group. Her geographic concentration is the Midwest region, while supporting other key relationships nationwide. Read has more than
13 years of commercial real estate industry experience, with
a concentration in multifamily and multitenant commercial
originations nationwide. In her career, she has originated
more than $1 billion worth of business on all asset types.
Reach Read at misty.read@huntcompanies.com.
The Multifamily Arena Can Be Lucrative
Here is what you need to know to help borrowers find apartment-property financing
By Misty Read
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