New to Multifamily...Why is some financing so much better?

[Steve A.]

Hey apologies for the vague title, but I am new to looking at investment grade multifamily properties, coming from 1-4 unit properties. These 1-4 units of course have fannie/freddie loans available at 4.xx interest rates, 30 yr am, 30 yr term. When I began looking at 20-40 unit apartment buildings in my price range, I have so far found the financing options to be very poor. I found a lender who does a 30 yr am, 30 yr term surprisingly but the rate is roughly 8%. I found another whose rate is 7% but this is a 5 yr ARM. I don't mess with ARMs, balloons, interest only, or any other funny business. In my situation currently, the loan would be a partial doc... thinking this might be the issue I inquired about it, but full doc only drops the rate maybe 0.5%. How does anyone make any money, in the current environment of low cap rates, where finding an 8 cap is not easy, with 8% interest rates? Just banking on paydown/appreciation? My priority is cashflow and this kind of financing ruins it.

However I am also getting involved in some syndications, and when I look at these deals the syndicators are getting rates sometimes in the 3's.  These are some sort of government loan programs.  I am thinking maybe they are only available to properties of a certain number of units or price range?  Does anyone know the cutoff between these awful 8% rates and the favorable 4% rates?  I need to start looking at properties that will qualify for the lower rates...it doesn't make sense to invest directly otherwise.

[Josh Dillingham]

I am in the process of closing on a commercial mortgage at 5.25% 5 years fixed, amortized over 20 years with no points. This is with a local bank.  So there are definitely commercial options out there well under 8% as you mentioned. I think you will have a difficult time finding a commercial mortgage with anything more than a 5-10 year term and 20-25 year amortization.

[Steve A.]

The term being less than the amortization makes me wary. I know it’s typical but is everyone 100% sure they’ll be able to refi no problem at the end of the term? What if you can’t? Some of these syndication deals have fixed rates for 30-35 years

[Michael Le]

The ones with 30-35 year terms are the HUD loans. Those are not common and are usually for larger properties getting built. So if you see them in syndications I would assume they are relatively new apartments and it would be a loan assumption.

In your case if the loan is large enough (~$1M) and the property qualifies then you should be able to get 7/10/12 year terms with 30-year amortization in the low 5% range.

[Caleb Heimsoth]

Typically youll see 20-25 year amortization with 5-10 year fixed rate and probably a 5 year balloon payment that requires you to refinance

[Michael Masters]

Welcome to the confusing world of commercial loans. I was just as surprised as you when I made the move to larger apartment buildings, the terms and terminology are much different.

My best luck has been working with Freddie Mac. My deal closing tomorrow has a 7-year “fixed” (fixed because balloon due at year 7) with 30 year amortization with a rate of 4.59%. However, I know the rate has gone up 0.60 since I locked. This is from the Freddie Mac small balance loan program (loans from $1m to $6m, not so small to me!).

Finding deals that work with higher interest rates is difficult. In the last 2 years I’ve only found 2 that worked for me and I was working all areas big and small in between NYC and Boston.

As far as what happens when the balloon is due, I’ve put down 35% to mitigate this risk. My property loans mature at spaced out dates to also give me breathing room. Still, risk is there.

Good luck!

[Mike Dymski]

Originally posted by @Steve A.:

The term being less than the amortization makes me wary. I know it’s typical but is everyone 100% sure they’ll be able to refi no problem at the end of the term? What if you can’t? Some of these syndication deals have fixed rates for 30-35 years

I have a 7/25 with no balloon...fixed for 7 years, floats for the remaining 18 years...hybrid product.

[John Umphress]

@Steve A., I'm currently working my way through a deal on 72 units using Freddie SBL financing - 10yr term, 30yr am (I'm a buy-and-hold kind of guy) a smidgen under 5%, non-recourse.  I like my bank but they couldn't match that.  Worth noting that the SBL product is intended for loans $1m and above.  You can go lower but it will cost you some points.

[Steve A.]

These are all great posts that give me a much better understanding.  How would one go about getting a loan from Freddie?  Do you approach Freddie directly somehow or through a loan officer?  It seems it must be a loan of $1mm+.  I am going to pass on this deal with the 8% financing, it just seems silly to pay that. Will probably do syndications, notes, and some cash SFRs til I have enough to start playing with the big boys and getting these favorable rates.

[John Umphress]

@Steve A., as this is my first time pursuing Freddie SBL, I'm using a loan broker. Yeah, you have to pay them a fee but that is always true re someone with experience and who knows the ropes. I'm putting a substantial amount of money down, so my deal looks good with respect to LTV and DSR, two things they look at. (1031 exchange, and I am more focused on net income after debt service as opposed to maximum leverage.)

This deal is actually costing me a little extra money.  Why?  It is a portfolio deal for two properties and I am financing the properties separately in case I want (or need) to sell one before the term and so trigger a prepayment penalty.  Doubt that will happen but you never know.  Like having more flexibility.

[Dan Handford]

@Steve A. I have a great contact with CBRE out of NYC who does the agency (Freddie/Fanny) loans. They are considered a DUS lender and are great to work with. Even though this person is located in NYC he does loans all across the US. 

PM me if you are interested and I will share his contact information for you. He will also help you underwrite these smaller deals. He specializes in the small balance loans from minimum $1mil to $7.5mil.

[Adam Adams]

Steve A. Something I’ve found is that the 5 unit to 70 unit space isn’t as coveted by many lenders.

You’ll see the loans getting great again once you get above 70 units.

[Mike Montana]

@Steve A as many have noted below it’s certainly typical to see 5 to 10 year terms on 20 to 25 year amortization for commercial financing. As for rates I certainly believe you should be in the mid to low fives. If you are looking at deals that are less than $1 million loan I have a good connection with a local bank in Indianapolis who has a pallet for those type deals. We work with them in the past on smaller multi family deals PM me if you would like me to connect you. Happy investing!