New to Multifamily Loan Qualification

[Chris Ha]

Hi there!

I'm new to multifamily and am looking to understand what sort of loans I will qualify for when trying to purchase a 16+ unit. I understand I'm most likely looking at 25% down with 6 months of PITI reserves.

My current situation:

• I live in LA, currently house hacking
  • I ran my numbers and am planning to sell off everything and rent where I live and own where I rent
• I own 2 single family homes that I'm planning to sell to acquire ~$400k for this multifamily purchase
• I recently purchased 1 duplex
  • I'm assuming this can help season me as a multifamily investor
  • I'm planning to keep to 1031 in the future

My question is: Will I be able to acquire 30 year fixed 5% loans as a first time investor (this is just what I'm seeing for single family homes)?

I found this noting "Time in Business" and "Experience" which I don't really have yet since I just acquired my first duplex and it isn't quite what I'm looking to invest in with 16 units+ (seems like a chicken and the egg problem): https://fitsmallbusiness.com/commercial-real-estate-loans/.

Thank you!

[Karen Schimpf]

@Chris Ha, 

In multifamily the number of units is important, the loan amount size, occupancy rate, if the seller can provide P&L's or tax returns, your experience, population, state, city, value per door etc. will determine which multifamily program you will be able to apply for. 

The HUD program has a 35-year fix and 35-year amortization, the loan amounts can go down to $2MM but many lenders do not want to lend on anything less than $3MM or higher. Plus HUD only allows you to pull money from an escrow account 2x a year plus you have to pay an auditing fee annually. The HUD program is awesome because the rate and the amortization are amazing, it really makes a property cash flow well. Even though the HUD program doesn't require you to be experienced, the program is truly created for a more experienced investor because of the cost and the structure of draws.

If your loan amount is $1MM above you can go to Agency which does offer 5-year, 7-year, 10-year etc. fix with up to 30-year amortization. Once again, the guidelines on agency allow $250K but most lenders do not lend unless the loan amount is above $1MM.

If the loan amount is below $1MM than you can apply for commercial loan programs that do offer the 5-year, 7-year, 10-year with up to 30-year amortization but the rate is going to be higher than agency rates.   The minimum loan amounts on some of these programs vary between $250K to $500K.

There are programs for loan amounts below $250K but the rates are even higher but you still have the ability to utilize the 30-year amortization.

You can go to the local bank and get a loan but their products are different.  The local bank typically offers a 5-year fix either with a 15 year or 20-year amortization or 15-year fix with a 15-year amortization.  The rates are better than the 30-year amortization but typically the PAYMENT ends up being higher on a 15-year or 20-year amortization.  Also, qualification and documentation are more tedious because the loan has to able to global debt service. Global debt service means looking at your personal and all business tax returns and then all your personal and business debt to calculate the debt service. Also when the bank calculates the debt service, they use a higher rate than what they quoted to test risk of the loan.  Some of the programs listed above require a global debt service but there are other programs that only debt service the property.