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Updated almost 7 years ago, 12/23/2017
"Sharing" a mortgage loan for Multi-family property
Hello all,
Would like to start off by both saying thank you in advance for any input you may have and, also, that I am a newbie to real estate investing, as my question will reflect.
After listening to several of the bigger pockets podcasts and reading blog posts, I am interested in moving towards investing in multi-family properties. In order to find complexes with more units or complexes in more desirable locations, I'm interested in going in on the property with some friends. Can someone point me in the direction of the best reading material detailing how one shares a mortgage? Additionally, is it possible to take the mortgage out under one person's name and have the other folks contribute as private lenders? If so, how does this work, from a tax perspective? What are some things to consider when doing either?
Again, any thoughts, help, comments are very much appreciated.
Thank you for your time,
Daniel
@Daniel Spaizman - I highly recommend Commercial Mortgages 101 by Reinhard. I had spent several years toiling away within the confines of Freddie/Fannie loans until I picked that book up.
A great way to structure what you're wanting to do is through an LLC. Set up an LLC, make each of the contributors partners in the LLC and outline the partnership structure within the operating agreement. I'd suggest having a lawyer draft or review this before everybody signs it and writes their checks. The next thing to do is call around to commercial lenders and see who the big players are in the area you're looking to invest. Talk to them about what you're trying to do and how it could fit within their underwriting structure. You will not find terms as good as a residential mortgage, but you will also find a lot less red tape.
Hope this helps!
Lenders want to see at least 1 guarantor that is strong enough asset/cash flow wise to pay off the loan in a down cycle. They don't want to chase 4 people for 25% of the loan shortfall from each of them.
Hi @Daniel Spaizman,
Your best bet is to read up on the possible structures and consult with a real estate attorney on how to structure a borrowing entity (LLC), as @Michael Seeker mentioned. This is a recent article from an attorney on how they're structured in the Joint Venture world where a sponsor teams up with a capital source, in this case private equity funds, to form a borrowing entity. Much of it is applicable to you and your friends forming a venture.
You wouldn't be sharing the mortgage per se, the lender would fund to one borrowing entity made up of multiple members or partners. In the Fannie/Freddie world, anyone who is a >20% owner of the LLC will be looked at by a lender as a general partner, and be required to provide financials, sign the non-recourse carveouts etc, and anyone <20% ownership would be considered a limited partner and not face as much scrutiny.
You would not be able to have a loan in one person's name and other folks be private lenders. While some lenders allow subordinate liens, having multiple lien holders who are essentially investors is not an option. Hope this helped a bit, best of luck!
Thank you all for the great (and quick!) input.
@Michael Seeker and @Conor Freeman , I will certainly look into taking the LLC route. Additionally, looking into commercial loans makes sense.
@Stan Sugarman I can certainly understand a lender not wanting to deal with 4 times the paperwork and potential issues that could arise with a group of that size.
Originally posted by @Daniel Spaizman:
Hello all,
Would like to start off by both saying thank you in advance for any input you may have and, also, that I am a newbie to real estate investing, as my question will reflect.
After listening to several of the bigger pockets podcasts and reading blog posts, I am interested in moving towards investing in multi-family properties. In order to find complexes with more units or complexes in more desirable locations, I'm interested in going in on the property with some friends. Can someone point me in the direction of the best reading material detailing how one shares a mortgage? Additionally, is it possible to take the mortgage out under one person's name and have the other folks contribute as private lenders? If so, how does this work, from a tax perspective? What are some things to consider when doing either?
Again, any thoughts, help, comments are very much appreciated.
Thank you for your time,
Daniel
Most of the stuff for people that are engaged to be married, but not yet married, but want to apply for a mortgage together, will be applicable to you. Lots of content available for that. :)
To wit, most of the "what if we have a falling out?" stuff will be applicable.
@Daniel Spaizman : all of the above advice is very good. I would note however, that all of it pertains to commercial multi-family, which is 5+ units. If you are thinking about 2/3/4-plexes (which is considered residential multi-family), then a different set of advice will apply.
James
Originally posted by @James Kojo:
@Daniel Spaizman : all of the above advice is very good. I would note however, that all of it pertains to commercial multi-family, which is 5+ units. If you are thinking about 2/3/4-plexes (which is considered residential multi-family), then a different set of advice will apply.
James
This is not accurate. I have commercial loans on 2-4 unit properties with numerous lenders in multiple states. I have not explored commercial loans on SFRs which I believe are much less common, but they are absolutely applicable and very useful in the 2-4 unit space.
Originally posted by @Michael Seeker:
Fair enough. I agree that you can get commercial loans against residential class properties (1-4 units), in which case you can utilize an entity on the loan.
However if you are looking for residential class properties and decide to use conventional residential financing, you probably won’t be able to have the loan against the entity: it will have to be in your personal name potentially with co-signers.
@James Kojo and @Michael Seeker, thank you for the fruitful discussion. I believe the money we would be able to put down for a property would be at the 3-4 unit range, so certainly on the fringe. Should it be the case that LLC is the safest way for us to "share" the mortgage, I will seek a commercial loan. In general, are the interest rates and terms for commercial loans severely different than that of a residential loan?
Best regards and thank you for your time,
Daniel
@Daniel Spaizman - rates and terms are different, but not prohibitively so.
Residential
Pros: lower interest rate (25-100 basis points), 30 year term and amortization
Cons: No LLC, strict underwriting guidelines
Commercial
Pros: has flexibility on terms and underwriting, typically requires LLC
Cons: normal structure is 5 year term and 20 year amortization, interest rate slightly higher
These are generalities and depending on your area and banking connections, you may have much better or much worse luck with commercial loans.
To add-on to @Michael Seeker response:
conventional residential loans tend to have less variety in loan parameters. You'll typically see 5/1, 7/1, 10/1 and fixed, all with 30-year amortizations (am) and terms (no balloon payments.)
In commercial, you get a larger variety in loan parameters (terms and am), and a majority of loans will have a balloon payment, so the term is often shorter than the am. As such, they usually don't lend themselves to apples-to-apples comparisons. They are also a bit harder to find, especially if you're investing out-of-state. You'll need to tap your network (or BP!) to find the local lenders who will lender to OOS investors.
Hope that helps!
James
In most cases it doesn't make sense to do a commercial loan on anything less than a 4 unit property. Most banks don't even want to lend on a commercial loan if its under $1MM. If you go to a local bank you can find ones willing to lend under the $1MM mark. Commercial is very different from Residential lending, and requires more $$$ down and the numbers to make sense before the bank will even do it.
Or you could simply create an LLC, create (2) shares (or whatever # to apportion the investment), and then deed the property to the LLC when finished. You can put both your names on the loan, and commit the funds from the LLC to the down payment. Talk to your CPA about the specifics for your state. The LLC creates the shares/interest, and the Quitclaim deed in the LLC creates the security to the investors for the LLC.