How to finance multifamily 5-8 units without income: Common terms and guidelines

[AJ Wong]

Certain property types can be more difficult to finance than others, one of the more difficult to secure financing for is multi family or mixed use properties above four residential units. 

We've seen a very strong uptick in interest for small balance multi family properties and how to secure financing for them. Historically an excellent place to start your mortgage search for 5-20+ unit properties is a local credit union. Generally they will want the investor to be a member or have a business relationship with the CU. They will also have tight guidelines and likely the borrower will need to be very well capitalized and qualified. Last year we were able to connect an investor of a coastal six plex with our personal credit union and due to strength of borrower and property, they provided a non-member with a 25% down mortgage with a 25 year amortization on a property the seller was requiring 'cash only' due to the presumed challenges of multi family financing. 

An alternative can be Non-QM or non-conventional financing. These are generally business loans based on assets and income of the property often structured as DSCR (Debt Service Coverage Ratio) loans. Many investors offer residential 1-4 unit financing but a vastly smaller percentage offer 5+ units. There are several notable Non-QM lenders that offer reasonable terms on 5-8 units and very strong borrowers (with half the networth of the amount they're seeking to borrow) can go up to 29 units.

In general max LTV on 5-8 units will be 70% of the purchase price. The property will have to carry the full operating costs and debt obligations by a factor of one. Terms are typically amortized over 30 years with an interest only option for the first ten. Pre Payment penalties are standard of 3-5 years, and can usually be eliminated completely for an increase in the interest rate of 1.5-2%+/-. Most 5+ units require a commercial appraisal, be prepared for an appraisal investment of $3-4-5k depending on your area and how many units. Allow for 30 days to close a 'commercial' loan but can be done quicker depending on the appraiser's availability. Usually mortgage investors do not prefer first time investors looking to acquire multiple units, but there are exceptions. Typically the transactions is closed in an LLC and members will need to have at least six months PITI in reserves, sometimes for each property they or the LLC owns..

So what about rates? Lenders that specialize in this property type area are reasonably competitive. Assuming excellent credit, with 30-35% down on a recent eight plex the par rate is in the low to mid 8%'s and can get into the high 7%'s with discount points. More common at the moment will be rates in the 8%-9%'s. 

Those can be workable terms, considering as of this writing a conventional SFR 30 year rate is in the low 7%'s..high 6%'s.

Often the property income is going to dictate the loan to value and lenders usually have minimum loan amounts for 5+ unit properties as well, anywhere from $350-500k minimum is common. 

Anyone been struggling with selling a multi plex due to restrictive financing options for investors? 

We're seeing a lot of lenders come online with creative DSCR and no ratio solutions..there are even investment property HELOC's that use rental income to qualify. Theoretically a DSCR HELOC and DSCR multi family purchase could be coordinated with little to now hard capital out of pocket to the client as most lenders allow down payment funds from cash out against other properties.

The mortgage market is extremely healthy and well capitalized for the moment. Investors and lenders are finding increasingly creative ways to get deals done.