Multifamily Loan Options

[Matthew Wright]

I'm looking for some direction in determining loan type.

I've only used local banks for my smaller multis. This year I plan to purchase a multi for $1 million or more (which i believe is the minimum for fannie mae/freddie mac?). Im wondering if when getting into $1 million+ price range, I should be going the fannie mae/freddie mac direction, or stick with the local banks?

Im considering FN/FM because I've heard they have better terms, like 15% down and 30 year amortization, but if thats not the case I think Ill stick with my local banker... looking for someone to talk to but I'm having a hard time finding someone on the local level here in Maine, that handles these loans.

[Evan Polaski]

@Matthew Wright: You are looking at the Fannie/Freddie small loan product. Typically, these are up to 80% LTV non-recourse loans. They are also typically lower interest than local lenders. But the trade-offs are: potentially more stringent underwriting standards, net worth equivalent to loan balance, and since COVID have had more stringent reserve requirements.

More than the LTV, most deals are limited by DSCR. You will also be working through a broker to secure these loans, who may have a fairly hefty fee associated with their work.

Overall, they can be a great lending source, but it is not always a clear cut decision whether to use the agencies or local lenders.

[Matthew Wright]

@evan polaski Thank you, that is helpful. Sounds like they might not be as great as I was hoping, and if investing in smaller multifamily, I should probably stick the local banks... Thanks!

[Spencer Gray]

What terms are you seeing from your local banks?

Right now with the COVID debt service reserves, Fannie and Freddie aren't as attractive as they were, even with a few years of i/o. 

We have been going the bridge loan -> HUD 223(f) route. Recently quoted for 2.2% + .25% green MIP, 35 year amortization/terms, 85% LTV, COVID escrows can be covered by a letter of credit from our bank (unlike Fannie and Freddie).

[Matt Heath]

@Matthew Wright: Evan is right on with requirements. I just had a conversation with a broker and have found that it makes more sense to scale up with a local lender and once you get to a larger number of units where scalability sets in to switch over to agency money. The reason I say to use local lenders to scale is because if you are looking to buy value add apartments a local lender may waive the prepayment fee if you cash out refinance with them as long as you continue to hold everything with them. 

In the beginning every penny has to be utilized to scale and with agency money there are a lot of fees associated that can really cripple your efforts to move up. If you are using syndication, then agency money all day as it is non recourse. 

Overall, it is going to depend on what your investment strategy is to determine which route to go. 

[Matthew Wright]

@Spencer Gray 

With my local bank I'm at 3.8% fixed for 5 years, 80% LTV, no prepayment penalty as long as refi is in house, no net worth requirement. Im not sure of their DSCR as they've never out right expressed that as a requirement, probably because my deals comfortably exceed the general 2.5% rule...

[Kathleen D.]

@Matthew Wright

I know you can do conventional loans on commercial for less than $1M purchase.  They are definitely going to be the cheapest money, but likely the most difficult to qualify with.  Start with local banks, and if one declines don't give up.  Keep trying lenders until you find one that will work with you.  Good luck to you!

[Matthew Wright]

@Kathleen D.

So, there are conventional loans available for 5+ units? I've never heard of that, that would be great!

[Benjamin Aaker]

Hi @Matthew Wright, indeed there are conventional loans for > 4 units. These loans aren't backed by the government, so the scrutiny is done by the bank to see if the property (and you) are worth their investment. To compensate for this risk, you will have to put more money down (at least 20%) and the interest rate will be higher than Fannie/Freddie, which we call institutional money.

An institutional loan will have better terms, but they will look at your history as a landlord, the property's history, and will add a prepayment penalty. If you can meet their criteria, their product usually beats the bank. They want to have their investors make an expected return on their money, and the prepayment penalty helps insure that. If you plan to hold it for many years, the penalty won't be a problem. If you do plan to sell the property, that prepayment penalty might cause you a problem. The loan might be assumable (able to pass on to the buyer) but the buyer might not like the terms because interest rates have gone down. The buyer pool shrinks and the value of the property does along with it. 

[David Lilley]

@Matthew Wright for agency debt, the loan size will need to be $1mm+, so purchase price of $1,250,000. However, I would be looking at local/regional banks right now. Competitive rates and some may not require COVID reserves. If you go Freddie/Fannie, you will have to escrow 6-12 months (depending on LTV) of principal and interest payments. That really hurts the returns on most deals.

[Blake Choisnet]

Originally posted by @Spencer Gray:

What terms are you seeing from your local banks?

Right now with the COVID debt service reserves, Fannie and Freddie aren't as attractive as they were, even with a few years of i/o. 

We have been going the bridge loan -> HUD 223(f) route. Recently quoted for 2.2% + .25% green MIP, 35 year amortization/terms, 85% LTV, COVID escrows can be covered by a letter of credit from our bank (unlike Fannie and Freddie).

What has been your experience with this type of loan? I've heard close times are longer and it's an administrative headache with higher origination fees, but can be worth it due to the rates and amortization schedule. 

[Vasundhara Ranjani]

Originally posted by @Spencer Gray:

What terms are you seeing from your local banks?

Right now with the COVID debt service reserves, Fannie and Freddie aren't as attractive as they were, even with a few years of i/o. 

We have been going the bridge loan -> HUD 223(f) route. Recently quoted for 2.2% + .25% green MIP, 35 year amortization/terms, 85% LTV, COVID escrows can be covered by a letter of credit from our bank (unlike Fannie and Freddie).

Which lender(s) do you use to get the HUD 223(f) loans? I'm looking at a couple of opportunities that are > $3m each and so the 20% down payment is a bit steep - these are in low-income neighborhoods so investing with maximum leverage (i.e. 10% down) would be best. Are there loan products out there that will allow 10% down? If so, what are they and how can we go about getting those? So far all our deals have been through big banks (WF, USB etc.).

[Spencer Gray]

@Vasundhara Ranjani We use Merchants Capital based out of Carmel, IN for our HUD 223(f)s as well as their bridge product to close the transaction. Close times are very long (we are closing on one this month that we've been working on for 14 months! Pre-covid it still took 4-6 months to close a HUD 223(f)). They are fee heavy, although almost all of the fees are rolled into the loan itself.

Long story short, it's a headache, but worth it to lock in sub 3% for 35 years. 

I would only advise going this route if the project is a long term hold, otherwise go agency or bank with flexible pre-payments. 

[Kyle Jean]

Agreed with Spencer. HUD is best for mid or long term holds. If doing a merchant build or selling an existing asset within two or three years, etc it doesn't make sense to go HUD.