Rental Property Investor · Member since 2018 · 21 posts · 8 votes
I am looking for advice on financing construction and converting to long term financing. The property is a recent purchase and currently cash flows. Part of appeal for purchasing is that fact there are existing pad sites with water and sewer hookup in place. As it sits, there are 7 townhouse style units with below market rent. Rent was scheduled to increase April 1 until the pandemic, and has been delayed by several months. The projected gross rental is $92,400 annually. The current debt service including taxes/insurance is $60,600. The current valuation is approximately $900k with $600k loan balance. The cost of constructing an additional 7 units is between $1.3-1.4M and would generate a projected $118,000 annual rent for a total of $210,000. The valuation would be approximately $2.5M. The goal is to convert the debt to 30-35 year fixed using a federal loan program as this is a long term hold property. An additional 4 units could be added as well in the future, but is not in the immediate plans. What is the best way to achieve construction funding and how difficult is it to obtain Fannie Mae or Freddi Mac long term funding? I have done several single families, but this is my first multi-family.
Hi Greg, obtaining agency financing (Fannie/Freddie) is relatively easy once the property is leased and stabilized. You need to show 90 days of income. The agencies have a small loan program so this is a perfect fit. The small loan program has more flexibility and lower closing costs. Personally, I like the fact that with the small loan program you can structure a flexible prepayment penalty.
As it relates to construction, I would not go with FHA financing. Closing an FHA loan takes several months and you need to use prevailing wage. There are some other drawbacks. I would take this to a local community banks. The leverage will be lower but in the end it's a better deal.
Thanks for the response. I am looking at the Fannie Mae Multifamily Small Loan Program. Are you familiar how strict the sponsor requirements are, specifically borrow must have net worth exceeding loan amount. Currently, I am getting my information from CREFCOA (Commercial Real Estate Finance Company). Any positives or negatives?
Freddie needs to see minimum liquidity of about 10% of the loan amount (there is room to negotiate) and more than one property under ownership and management. Agencies need up to 12 months of P&I reserves at the moment.