Lenders for multifamily investment (4 units) in Houston

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Lenders for multifamily investment (4 units) in Houston

Felipe Carrillo
Spring, TX · Member since 2016 · 39 posts · 8 votes

Hi BPers,

Looking at a multifamily property (4 units) that needs a considerable amount of repairs (~50k). Does anyone know of a lender that is willing to lend for the repair costs as well as lending for the long term, once the property has been rehabbed? Essentially thinking of the BRRR strategy for this multifamily property but trying to avoid the costs of having to close twice, which I'd have to do if I were to go with private money to make repairs and then refinance into "conventional" financing. Any tips would be greatly appreciated.

Thanks!

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Andrew PostellPro Member
Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
7y

@Felipe Carrillo and @Maurice Walker i thought I might as well tag you both just in case it was helpful.

A couple of loan options were mentioned above and I wanted to clarify here:

If you were to occupy this property this would be an entire different discussion.  I will assume this is an investment property for the sake of this discussion (if different please let me know):

For multi-family renovation loans there is no "agency" solution. 203(k) loans are an FHA product....which means you have to occupy. Fannie Mae HomeStyle is a renovation loan that can be applied to Single Family Home investment properties....but not 2-4 unit investment properties.  HomeStyle can be applied to owner-occupied 2-4 units just for reference.

So that leaves us with portfolio/commercial solutions or hard money solutions. What generally occurs in these scenarios is that a short term, commercial or HML is used and THEN using a Fannie/Freddie type of loan to refinance out into your permanent financing. This does mean some extra costs....payments to the short term loan, 2 sets of closing costs, etc. So that generally means you just need to adjust your offer a little bit to compensate for this.

In Texas, the general commercial style loan in this scenario is a 20 year Adjustable Rate Mortgage.  There are a good number of investors that just stay in that loan.  So you don't HAVE to refinance out of something like that if you don't want to but I think if you used Hard Money you would HAVE to refinance.  Those commercial loans would likely come from smaller, local lenders.  So I know a few up in Dallas-Fort Worth...but they don't lend in Houston.  And probably the same for the Houston lenders not lending up here.

I hope that helps in some way.  If you are looking for specific lenders for this type of product feel free to post in the Texas forum itself.  There are plenty of us in that forum and we tend to have a lot of participants from Texas in Bigger Pockets.  Might be a good place to ask for this sort of thing.

@Scott D Burrows thanks  for the mention.  Feel free to tag me with any other questions.  Good luck!

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  • Justin Kane
    Specialist · San Antonio, TX · Member since 2015 · 909 posts · 297 votes
    7y

    203k loans, conventional rehab loans to start but also BRRR strategy is good too but if you qualify for agency debt then that may be the best option as it costs less.

    0Reply
  • Felipe Carrillo
    OP
    Spring, TX · Member since 2016 · 39 posts · 8 votes
    7y

    @Justin Kane Thanks for the input! I haven't heard of agency debt. Would you mind explaining what this entails?

    1Reply
  • Justin Kane
    Specialist · San Antonio, TX · Member since 2015 · 909 posts · 297 votes
    7y

    Certainly agency debt is just your standard residential or commercial fannie and freddie loans

    3Reply
  • Scott D Burrows
    Rental Property Investor · Indianapolis, IN · Member since 2018 · 128 posts · 113 votes
    7y

    @Felipe Carrillo

    Call @Andrew Postell he is in Texas and is EXTREMELY knowledgeable. 

    He will be able to make a loan work for you I have no doubt.

    Also, the type of loan you are trying to get is probably called a Homestyle Loan, but it does require occupancy at some point I believe. 

    Good Luck,

    -Scott

    1Reply
  • Maurice Walker
    Houston, TX · Member since 2015 · 16 posts · 4 votes
    7y

    @Felipe Carrillo Once you find your answer(s) can you share them in this thread. I'm looking into small multifamily units as well and would like to see what options you find, which one you choose, and what drove your choice. Thanks in advance and good luck investing! 

    0Reply
  • Shahriar Khan
    Investor · Houston, TX · Member since 2010 · 234 posts · 145 votes
    7y

    @Felipe Carrillo if its not livable (guessing not) then you will not be able to get institutional /conventional home loan. Same would apply for commercial loan unless you have a portfolio already with them. 

    On that other note, if double closing cost throws off a deal then deal is very marginal to begin with ... on the flip side .. even if you pay closing cost twice , you could possibly offset that by closely managing your repair cost and negotiating 1/2 pts off from short term lender/commercial bank.  Put the contract ..if you think its doable..... 4 plex are tough to come buy at a decent price 

    1Reply
  • Andrew PostellPro Member
    Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
    7y

    @Felipe Carrillo and @Maurice Walker i thought I might as well tag you both just in case it was helpful.

    A couple of loan options were mentioned above and I wanted to clarify here:

    If you were to occupy this property this would be an entire different discussion.  I will assume this is an investment property for the sake of this discussion (if different please let me know):

    For multi-family renovation loans there is no "agency" solution. 203(k) loans are an FHA product....which means you have to occupy. Fannie Mae HomeStyle is a renovation loan that can be applied to Single Family Home investment properties....but not 2-4 unit investment properties.  HomeStyle can be applied to owner-occupied 2-4 units just for reference.

    So that leaves us with portfolio/commercial solutions or hard money solutions. What generally occurs in these scenarios is that a short term, commercial or HML is used and THEN using a Fannie/Freddie type of loan to refinance out into your permanent financing. This does mean some extra costs....payments to the short term loan, 2 sets of closing costs, etc. So that generally means you just need to adjust your offer a little bit to compensate for this.

    In Texas, the general commercial style loan in this scenario is a 20 year Adjustable Rate Mortgage.  There are a good number of investors that just stay in that loan.  So you don't HAVE to refinance out of something like that if you don't want to but I think if you used Hard Money you would HAVE to refinance.  Those commercial loans would likely come from smaller, local lenders.  So I know a few up in Dallas-Fort Worth...but they don't lend in Houston.  And probably the same for the Houston lenders not lending up here.

    I hope that helps in some way.  If you are looking for specific lenders for this type of product feel free to post in the Texas forum itself.  There are plenty of us in that forum and we tend to have a lot of participants from Texas in Bigger Pockets.  Might be a good place to ask for this sort of thing.

    @Scott D Burrows thanks  for the mention.  Feel free to tag me with any other questions.  Good luck!

    7Reply
  • Felipe Carrillo
    OP
    Spring, TX · Member since 2016 · 39 posts · 8 votes
    7y

    @Andrew Postell Thanks so much for the explanation. You are correct in that this is an investment property. Out of curiosity though, what are the requirements for the Fannie Mae HomeStyle in terms of the length of time that one must live in the property before it can be rented out? Could one perhaps do short term rental (like Airbnb) while this length of time lapses and then rent it out? Just brainstorming different options for this multifamily property. Also, do they lend for repairs and is it also an ARM type of loan or fixed interest?

    Thanks again!

    0Reply
  • Maurice Walker
    Houston, TX · Member since 2015 · 16 posts · 4 votes
    7y

    @Andrew Postell really appreciate you taking the time to go over this for us. For me I am interested in starting out doing owner-occupied. What would be the difference in using one over the other with regards to a HomeStyle and 203k loan? I'm not too familiar with the HomeStyle loans but I am aware that using 203k or FHA loans in general may prolong the closing timeline. What are your thoughts?

    0Reply
  • Andrew PostellPro Member
    Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
    7y

    @Felipe Carrillo for the Fannie Mae HomeStyle, if you were to occupy the 2-4 unit property you can renovate it and rent it immediately.  Is that what you are asking?  If you mean, how long do you need to live in the 1 unit you are occupying that would be 12 months.  I hope that answers your questions but let me know if it doesn't.

    0Reply
  • Andrew PostellPro Member
    Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
    7y

    @Maurice Walker if you are occupying then the whole world opens up to you with loans.  

    First, if your lender is good, the closing time will be the same for conventional loans vs. FHA loans.

    One of the primary differences between FHA and Conventional here is that a standard conventional loan will have different down payments on 1-4 units. So a 1 unit is 5%, a 2 unit would be 15%, a 3-4 would be 25%. Again, this is pretty specific so these numbers are only for the Fannie Mae HomeStyle loan (which allows renovation) if you were buying a 2-4 unit property with no renovation the downpayments will be different.

    An FHA 203K loan only requires 3.5% down. That can be a HUGE difference between loan types.

    But the Fannie Mae loan is a smoother loan to do. Fees are less. And things like PMI go away with a conventional loan. FHA it is forever. But FHA is more forgiving with credit. FHA "full" 203K require consultants...and there's lots more here too. LOTS. So it's really important that your lender knows these two loans back and forth and can guide you on all the pros and cons to them. FHA also has 2 different 203K types....and not every bank offers both types. Not every lender offers HomeStyle either. I've dropped some bullet points on both loan types below. I'm here in Texas too so feel free to PM me with any other questions. Thanks!

    Other Important Items to Know about “Conventional” Renovation Loans

    Maximum – Minimum Purchase/Upgrade Amounts:

    Maximum: Limited to 75% of the “after improved” value

    Occupancy: Primary, Second Homes, Investment Properties

    Renovation Term:

    • The renovation term for this program is a maximum of 180 days.
    • The Borrower(s) is responsible for the work being completed within the escrow period. If the work is not 100% complete by the end of the Escrow period,  may implement a .50% (on total loan balance) extension fee that will cover an additional construction term of 60 days. Borrowers will be provided an upfront disclosure detailing this information.

    Contractor(s) Acceptance:

    • Loan does not “approve” contractors or refer contractors. A borrower must choose his or her own contractors to perform the needed renovation.
    • All Contractors participating in the HomeStyle Renovation Program must complete a Contractor Profile Report. All Contractors are subject to the lender’s determination that the contractors are qualified and experienced, have all appropriate credentials required by the state, are financially able to perform the duties necessary to complete the renovation work in a timely manner, and agree to indemnify the borrower for all property losses or damages caused by its employees or subcontractors.

    Multiple Specialized Contractors:

    • Since this is a limited repair/renovation program, no General Contractor is required. However, A General Contractor will be required on all renovation projects over $25,000. Borrowers are not allowed to complete any of the work themselves as sweat equity.

    Loan to Value Calculations:

    The original principal amount of the mortgage may not exceed Fannie Mae’s maximum allowable mortgage amount for a conventional first mortgage.

    • Purchase: For a purchase money transaction, the LTV is determined by dividing the loan amount by the lesser of the "as completed" appraised value of the property or the sum of the purchase price of the property and the total rehabilitation costs.
    • Refinance Transactions: For a refinance transaction, the LTV is determined by dividing the original loan amount by the "as completed" appraised value of the property.

    Eligible Renovation:

    • Øhere are no required improvements or restrictions on the types of repairs allowed. However, repairs or improvements must be permanently affixed and add value to the real property.

    Costs and Escrow Accounts

    • The costs of the renovations will be based on the plans and specifications for the work and on the Construction contract for all of the work requested by the borrower. The renovation costs may include a contingency reserve and renovation-related costs.

    Contingency Reserves:

    • Contingency reserves 10 % required for any unforeseen cost overruns that may occur during construction.
    • Unused contingency reserves that were financed into the loan will be applied to the principal balance of the loan. If the contingency reserves were paid in cash, they may be refunded to the borrower.
    • The contingency reserve may be considered as part of the total renovation costs or the borrower may fund it separately. The contingency reserve may be released only if required, necessary, and unforeseen repairs or deficiencies are discovered during the renovation. Unused contingency funds, unless they were received directly from the borrower, must be used to reduce the outstanding balance of the renovation mortgage after all of the renovation work has been completed and the certification of completion has been obtained.
    • The loan is not re-amortized.

    Draw Schedule:

    • The HomeStyle program has a maximum 4 draw process.
    • The initial draw can be up to 50% of the total project and can be for materials for the project.
    • The final draw will be at least 10% of the total project as retainage and funds will be released upon receipt and approval of final inspection, Certificate of Completion from Appraiser, signed All Bills Paid Affidavits and Lien Waivers.

    Additional Draw Information:

    • Signed Draw Request by borrower and contractor
    • Signed All Bills Paid Affidavit
    • review and approve the draw request and will release funds for disbursement
    • A check will be issued in the name of the borrower and contractor and delivered to borrower via USPS
    • An inspection of work to date will be performed at 50% complete

    Final Draw Information:

    • Signed Draw Request
    • Final inspection/Completion Certificate will be required for release of final funds
    • A Title Update showing property free from lien or encumbrance
    • General Contractor’s Lien Waiver Affidavit
    • Affidavit of Completion GMG will review and approve the draw request and will release a check in the name of the borrower and contractor.

    Change Orders and Cost Overruns:

    • Changes to the initial plan are not permitted unless prior approval by Gateway Mortgage. Any work outside the scope of the initial plan is not permitted as the loan amount cannot be increased.
    • If the project encounters cost overruns, those cost overruns will be the responsibility of the borrower to pay.

    Renovation Term Extension Fee:

    • .50% of the total loan balance. This is a post-closing penalty charged by the Escrow Administrator to extend the renovation period beyond the maximum renovation term of 180 days in the event renovation is not completed within agreed upon terms.

    Other Important Items to know about FHA Renovation Loans

    A FHA option to roll renovation/repair work into the loan. Down payment is based on the total of the purchase price + renovation costs. Loan can go slightly over appraised value if the need were to arise.

    • 1.“Streamline Option” – or “Limited Repair Program”
    • a.Total financed rehabilitation costs cannot exceed $35,000
    • b.Maximum Sub-Contracts is 3
    • If more than 3 are needed then a General Contractor will be required
    • c.Repairs are limited to cosmetic repair only. Structural repairs are not allowed, such as room additions, foundation repairs, etc. Pools are also not permitted with Streamline Option
    • 2.Full Repair Option
    • a.Minimum of $5,000 in improvements
    • b.203k Consultant is required
    • i.FHA Approved Single Family "construction manager" who oversees and inspects the rehabilitation work from start to finish
    • c.Nearly any type of repairs is allowed (luxury items are not). Pools are permitted.
    • d.Maximum $75,000 in repairs or 50% of the after repair value, whichever is lower

    Contractor Approval

    • Contractor must be accepted  prior to final approval and be responsible for the entire project. Multiple sub contractors with multiple separate contracts are not allowed..
    • Repairs/Improvements must be completed by licensed contractor(s) as required by local/state municipalities
    • Repairs cannot be completed by a related or interested party (i.e. relative, real estate agent, seller, broker, etc.)
    • Borrower selects contractor

    Contingency Reserves

    • Minimum 10% is required. Can be financed.
    • With “Full” version – 20% reserves if renovation is major – foundation, room additions

    Draw Requests

    • “Draws” are funds paid to the contractor after work is completed.
    • For “Streamline” – pictures of completed work is permitted
    • For “Full” – Consultant inspects work
    3Reply
  • Felipe Carrillo
    OP
    Spring, TX · Member since 2016 · 39 posts · 8 votes
    7y

    @Andrew Postell Thanks again for the very detailed information you've provided. Yes, I meant to ask what is the minimum amount of time I'd have to live in one of the units before I can rent it out, which you mentioned was 1 year. I'll give you a call because I still have several questions. I'm assuming your contact information hasn't changed since you helped me last year with the rental loan, correct?

    0Reply
  • Ronald RohdePro Member
    Attorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes
    7y
    Originally posted by @Andrew Postell:

    @Maurice Walker

    • The final draw will be at least 10% of the total project as retainage and funds will be released upon receipt and approval of final inspection, Certificate of Completion from Appraiser, signed All Bills Paid Affidavits and Lien Waivers.

     Curious who typically provides the contracts and Unconditional Lien Waivers? Does the bank give forms or does Borrower provide? I've always drafted for commercial clients, but rarely see them on the residential side.

    0Reply
  • Andrew PostellPro Member
    Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
    7y

    @Ronald Rohde for this loan type Fannie Mae has the appropriate forms that are required.  Some lender may use a few of their own forms but for the most part they are all standardized by Fannie.  Hope that answers your question.

    0Reply
  • Andrew PostellPro Member
    Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
    7y

    @Felipe Carrillo you can PM me if you need.  Certainly nice to see you again! Most of my contact information should be the same.  Thanks!

    0Reply
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