Scaling Up from Multifamily

[Khayla McCoy]

Hi Everyone :-),

I hope everyone is staying safe and well. Happy new year! I'm a newbie investor interested in multifamily. I always hear about how easy it is to 'scale up' in multifamily. I would love to know how any of you have done it in the past. From my understanding (and I may not have all the info - still researching this), in order to obtain financing for properties of 5+ units, one would need to have a net worth greater than or equal to the amount of the loan being requested. Any ideas or previous experience is welcomed. I'm just curious about what scaling up could look like and how others are making this work for their unique situations. :-) All the best! 

[Jill F.]

Originally posted by @E. Lena Kontras:

@Khayla McCoy

Hi Khayla, that’s what we’re trying to figure out, too. Can we obtain a commercial loan without the personal income to support an additional 500K mortgage. If we can, then we could certainly scale up quickly. Did you find out anything else?

Hi Khayla and E. Lena, We had to start out with commercial loans because we were 'retired' and didn't have w-2 income. The underwriting requirements for residential (up to 4 unit) properties and for commercial loans are completely different. At one point we were approved for 1mil commercial loan and at the same time had trouble getting a 40k HELOC on our house because of DTI! (we use personal credit extensivey for renovations in progress)

For commercial loans, they don't use DTI (debt-to-income) the key metric is the DSCR Debt Service Coverage Ratio for the deal which is the annual NOI/annual Debt Service (Principal & Interest). Our bank requires at least 1.25 to lend on the deal and they calculate the NOI using the 50% rule. In addition, they looked at our personal situation, including total assets, business experiece, and our business plan. Underwriting will then use the banks (usually secret and proprietary) system to give you and your deal a risk score. At this point if you look acceptable, at a portfolio lender, your loan officer will take your deal to a loan committee which will decide partly based on your deal, your risk and probably on what the bank already holds and wants to hold if they want to loan on your deal and at what rate.