Best Multifamily lenders?

Question

I’m trying to buy a 4plex, but one of the units needs finishing inside to be rented. The seller priced it finished or as-is. The only lender I can find that will finance it as-is is a local community bank in the area that knows the seller and holds the loan for the property currently. Only problem is they want 25% down and on a 20year term. All other lenders want 25% with 30year term but all units must be livable condition. Im scared to buy it as-is, I don’t know if I have the time, skill and money to do it myself. The 30year term puts the mortgage would put the cost just below 3 units rented but the 20 year is more, I would be losing money until that unit is rented, I fell like ghe 30year lower payment is my margin of safety.

Where should I look for a lower down longer term mortgage, or a fixer upper for investment non live in 4plex property?

Louis Jeffries · Answer

@Malachi Hoots Hi Malachi, depending on the work to be done you may qualify for long term financing as is. For $15,000 renovation it is not good to exercise the BRRRR method because you have 2 sets of closing costs that can be mitigated if you have the funds to rehab the property. Paying the cash to renovate the property in this instance may be the best option. If that is not an option then purchase rehab can work. Based on $300,000 ARV at 75% you would qualify for long term financing of at least $225,000 ($240,000 if you qualify for 80% financing) With the purchase price only being $225,000 (plus the $15,000 rehab) this is a doable deal (though not the best deal according to the 70% rule). Regarding being stuck with a loan with bad terms, short term loans are based on the ARV which is determined by appraisal before the loan is done. Even though you may have as low as 10% down payment the maximum the loan will be is 70% to 75% of the ARV. That said if you qualify for conventional financing on an investment property you will not be stuck. Rehab loans are short term and never made if the future value / ARV does not work.

Louis Jeffries · Answer

@Malachi Hoots Hi Malachi, depending on your qualifications you can qualify for a purchase rehab bridge loan with interest only payments that would give you funds to complete the renovation and your down payment could be as low as 10%. Another concern is that you are buying a property that needs work. Are you paying full market price for the property or will you build equity once the property is renovated. In other words what is the ARV. The purchase rehab option allows you to buy with a lower down payment but you will refinance the property once it is renovated and fully rented. This is could be standard variation BRRRR.

Malachi Hoots · Answer

@Greg DornThanks Greg, I talk to another lender at BBT today and I’m not confident that there are enough recent comps for a conventional loan. She suggested a smaller local bank, commercial loans or a loan tied to a retirement account for collateral. Each option having its pros and cons, I just want a low 30 year fixed rate to cash flow with. I’ve found multiple 3 and 4 plex in rural areas that have the same issue getting a loan on them b/c of no sale comps. What’s the best angle? Low down, low rate, low cost?

Greg Dorn · Answer

@Malachi Hoots so with multifamily the sold comps do not come up as often and are less likely to be used compared to SFHs. You are better off getting the value based on the current rents and determining your ARV based on the future rents using the Gross Rent Multiplier. GRM is more commonly used for 1 to 4 unit residential properties compared to CAP rates which are for Commercial properties. I would try searching for anything that gives what the GRM is in your market online. IF you cannot find that then you can search for the rents for SFH in your area divided by the estimated current value of the property. Once you have a GRM you can take the current rents x GRM = current value and you can estimate the ARV (= GRM x future rent potential) to see if the deal is worth doing. The last refinance I did on my owner occupied duplex involved an appraisal and the value was determined on the GRM not the comps which gave us a few thousand extra in the value.Good Luck!

Malachi Hoots · Answer

@Louis JeffriesOk thank you, my realtor showed me some comps that sold a few years ago near by. I’m thinking about asking if the seller would pay the closing cost as part of the offer, it would be about 10k and I’d love to keep my cash. You seem pretty well experienced, what is a good number for cash flow on a 4 plex since I don’t expect a lot of appreciation. I’m looking at 7-10k per year and about 13-18% roi including pay down of the loan, depending on what I pay. Is that good, and keeping in mind it needs some outside work done. It would be 58-71k out of pocket cash that I have saved.

Louis Jeffries · Answer

@Malachi Hoots that's it. you pay for the appraisal. Do you have realtor? They can give you an idea of the property value. This is always one of the first steps in the process. That is get a good estimate of the property value before you make an offer. Do not rely on the sellers estimate.

Malachi Hoots · Answer

@Louis JeffriesThank you for that analysis, the place needs a roof and siding in the coming years but based on what you just stated, I’m going to make an offer with the owner fixing the one unit and fix the rest later. The next problem is I hope there are enough comps in the area for an appraisal, and if not how much money do I loose chasing the deal. I think $700 is what Wells Fargo is charging for a credit report and appraisal.

Malachi Hoots · Answer

@Louis Jeffries thanks for the reply, the owner estimate for the one unit rehab is $15k, but if they fix it I’ll be all in at $240k, plus closing. So 225k as-is. The Zestimate is 300k plus but the tax value is 231k. I don’t really know what the ARV would be, or how to forgive out if a refinance would be possible or worth it. The problem is I don’t want to be stuck with a loan long term on bad terms. The building will also need siding/ repair and a roof in the coming years, so if I could wrap that into a loan that would be nice. It’s all a little complex for a first deal, but If there’s a better way to play the deal I’d like to do so.

Malachi Hoots · Answer

@AJ H. Ok I’ll look into a bridge loan, thank you.

Aaron W. · Answer

@Malachi Hoots One option you could consider is short-term bridge financing for the project. The advantage of a bridge loan is they typically emphasize the deal in their underwriting. If it looks like a good property, then they will be more likely to fund the project. The bridge loan can also include rehab costs and can be interest only payments during the rehab period.The downside is the interest rates may be a little higher than a conventional lender. Best of luck!