How do Lenders look at multi-family properties

Question

Hello everyone, I was listening to one of the Real Estate Rookie podcasts the other day and they were talking about small and large multi-family properties. It's the niche I want to pursue and I'm currently figuring out ways to raise capital to get my first investment property. I don't have any money to do it myself so I have to get a little creative.

My main question is this: Do banks/lenders look at multi-family properties as personal property or a business property? If they look at it as a personal property, would it be worth it to establish an LLC so lenders will look at it as a business and lend more money based off how much income the property would bring in? (I do not make much money at all, ~$30k/year so I wouldn't qualify for much by myself.)

I hope that makes sense, and if there is something i'm missing then please feel free to let me know and also thank you all in advance!

Bjorn Ahlblad · Answer

@Javen Bowman your determination is admirable. I would suggest you join a local land lording group and get to meet investors in person. You might also look into investing in yourself to acquire training and skills to get a better higher paying job. Many/most investors start by saving as much money as we can and that is very hard to do on a low income. All the best!

Percy N. · Answer

@Javen Bowman, for larger multifamily the lender will most likely want you to hold the property in an SPE (Single Purpose Entity). If you bring in passive investors, you will need to follow some SEC rules and do a PPM.You will need some seed/pursuit capital to tie up the deal (deposits, 3rd party reports, lender deposit, etc). For larger multifamily, this will typically be $200k - $500k+Lender will want to see net worth equal to the size of the loan and about 10% liquidity.Every lender is slightly different, but this is what I have seen in the 1000+ units we own and operate.

Chris Levarek · Answer

@Javen Bowman As mentioned, anything past 4 units, income generated on the property will be counted and an llc will be needed to qualify a commercial loan. IF you don't have the net worth to qualify on a loan of commercial size even with the property income, consider bringing in what's called a "key principal" aka. someone of high net worth to sign on the loan with you. They are typically given a 1-2% ownership for doing this and this can be the only role they play.

Karl B. · Answer

The way I feel the lender views a property is: will Karl B. pay us each and every single month and if not how hard will it be to sell the asset?If the property is in good repair they can sell the property much easier and so they tend to shy away from a property that needs a new roof or is what they deem a dump.Regarding if I can pay them every single month, they do consider any vacancies and will likely demand I have the money in my bank account to reflect X number of months of unpaid rent due to a vacancy, especially if I need to make repairs to the property prior to being able to rent it out. Personally, I feel like when one has a track record a lender is more likely to lend to a LLC. But if one is starting out in R.E. investing I feel that it's easier to get a loan in one's name.

Bryan Mitchell · Answer

@Javen Bowman, I’m no lender but I’ve worked with some and I currently have a commercial loan on a property that had 4 and now has 5 units. Different banks have different products but generally, 4 and under is residential non commercial loan while 5+ is commercial. Someone on BP said that lenders look at your personal data for 4 and under regardless of LLC. As you go up in size past the 5 you can expect the lender to take into account the property’s profitability and less on you. Now the reason I set up originally a “business” loan despite it being four units was because it fell into the category of a portfolio loan. A portfolio loan is where you take more than one property and finance it collectively. So there are some general rules out there, but you need to get with the lender to find out what your type of property would qualify for. Best of luck!

Javen Wilson · Answer

@Chris Levarek Could those people that you could get to sign on the loan with you also bring say a down-payment for the loan? Or money for a rehab so you can do a refi on the property? I feel like it's something you could work into a deal or contract with them but don't know if that's something that has happened or ever does happen.

Javen Wilson · Answer

@Karl B. Yeah the only thing I fear is I will need to have either more net worth or some one else to carry the funds for me. I would probably try and get seller financing on my first one if I can find a motivated seller. Then once I've gotten some skin in the game and some money I can go to a bank to collect some bigger deals

Javen Wilson · Answer

@Percy N. The bigger properties such as 100+ units are not necessarily something I want to get into right now. I don't have any investments right now so I'd rather have a smaller multi family for my first deal so that way If I make a mistake it's a $5k mistake than a $500k mistake. But the information was helpful regardless I appreciate it!

Javen Wilson · Answer

@Bryan Mitchell Thank you for the response, pretty much hit the nail on the head. I feel I will have a harder time starting on SFH or small multi family so maybe the 5 units or more is where I can get started