Qualification for Multifamily Properties?

[Jack Miller]

Hello All!

I’m an investor local to Oklahoma City. I’ve done a few deals in the past, all of which have been single family and one duplex. I’ve decided to make the switch to multifamily because of the attractive cash flow that comes with.

In doing so I’ve been listening to more podcasts on the subject and have heard that when closing on 5 units and more the approval process is more based on the property and less on the individual. Does this mean that as long as I can meet the 20% down payment and the numbers work a bank will more than likely approve me?

Thanks in advance for your time in answering and reading!

[Charles Seaman]

@Jack Miller While it's true that the underwriting for commercial loans is more focused on the asset than the individual or the borrower, it doesn't mean that it's solely focused on the asset.  The creditworthiness of the borrower is still important and most lenders will underwrite any individual that has control over the asset.  What size multifamily properties are you looking at?  The criteria might vary a bit for deals with loans greater than $1MM compared to deals with loans less than $1MM.

[Jim Wellington]

As an asset based DSCR lender, you'll almost always need at least 25% down for the purchase of 5+. 1-4 will still qualify for 20% down.

Depending on your market and the underwriting criteria if the DSCR score doesn't meet the banks requirement you may need to either out more down or buy down the rate. Now you might be able to go to a more conventional lending route but my bet is you'll still need at least 25% down.

Good luck! 

[Jack Miller]

@Charles Seaman

Thanks for the input! I’m looking at a 5 unit this year

[Charles Seaman]

Quote from @Jack Miller:

@Charles Seaman

Thanks for the input! I’m looking at a 5 unit this year

Got it.  Requirements might be different for a property that size.  My expertise is in properties with loan amounts greater than $1MM.  Maybe somebody else can chime in with feedback.

[Benjamin Aaker]

Hi Jack, you'll still need to make sure you have the personal finances to get the loan in most cases. Another option would be to take on a partner as loan guarantor.

[Will Fraser]

@Jack Miller as a fellow OKC investor I want to throw some clarity into this conversation.

Multifamily itself is known for nice cashflow, BUT that is almost always referring to larger properties thanks to some great economies of scale you can achieve when you have 48 or more doors in one place.

In practice you can expect small multifamily properties in OKC to cashflow LESS than SFR or duplexes thanks to a few factors:

- Downgrade in tenant class -- you WILL experience a downshift in your tenants.  A properties will bring B tenants. B properties will bring C tenants, and so on.  

- Lack of stickiness -- small multifamily properties do not have the size, space, or scope to offer amenities, which is the thing other than price that makes people stay in a shared wall/shared floor/shared yard situation for longer than they have to.

- Code becomes a bigger and costlier deal -- all of your properties will be squarely considered commercial and NOT residential, so when you pull permits to do substantial improvements you'll *get* to install a sprinkler system, etc

- (speculation here) More susceptible to property tax hikes 

As for me and my house, we have chosen to buck the conventional wisdom and stick to SFR and small multi's (doubling down on what we know and are skilled at) until we can jump to more sizeable mutlifamily properties.

[Tyler Exum]

One point I haven't seen highlighted yet is experience. While unlike residential multifamily you will need 25% down, lenders also appreciate/may even require someone with experience to assure them that you can execute the deal. This doesn't mean you cannot do it on your own if you have the capitol, but it is something to be considered.

[Erik Estrada]

If you wanted to do a full doc commercial loan, most require commercial real estate investing experience, a personal financial statement (some want to see your net worth at or above the purchase price), and at least 20-30% down. 

If you wanted to do a DSCR loan, a minimum of 25% down, in some instances 20% (but not likely in this market). There are some no DSCR options as well that are beginner investor friendly but the rates are close to hard money.

[Rhett Tullis]

in okc almost all 5 units will be built around the 1920's or so.  very few newer than that.  also as Will pointed out the cash flow and quality of tenant is not as good on that type of property as 5 single family in a similar area.  i purchased a 72 unit last year and while overall it has been great it is certainly a different animal than a 5 unit or even 10 unit complex here in okc.