8 Tips to Follow when Making a Multifamily Loan Request

I’m often asked by aspiring and seasoned owner-operators about the process and requirements for getting a loan on a multifamily property. Whether it is a first timer’s very first multifamily loan or an independent owner-operator’s first agency loan, the process is quite different than the one for single family rentals. Here are a few tips for increasing the likelihood of approval and for overcoming the challenge you may face if you lack direct multifamily experience. This is written from a lender’s perspective. Others may have a slightly different perspective. Let me know what questions or comments you may have so that I can add to this post.

Before we begin, understand that every lender will look at things differently. These are some general guidelines that most lenders, such as me, follow. Follow this advice and you’ll increase your chances of securing a competitive loan for your multifamily property.

Tip #1: Understand how big of a property you can afford

To know how much you can afford, you have to consider

1) Your sources for your down payment. Are you purchasing a property on your own, with partners or are you syndicating a deal? If a large portion of your down payment comes from passive investors, you’ll have more cash to keep for post-closing reserves as a sponsor / guarantor; thus allowing you to qualify for a larger loan than you may otherwise on your own.

2) After budgeting your 20-25% down payment, set aside money for closing costs, including legal fees, and then determine the minimum post-closing liquidity required. The minimum varies from one lender to the next, but generally speaking, you should have a minimum post-closing liquidity equal to nine months of principal & interest payments. This minimum threshold can be met by one sponsor or many. Most lenders may not want to underwrite a lot of individuals, so keep it simple – five or fewer sponsors.

3) Some (not all) lenders, such as those offering Fannie Mae and Freddie Mac multifamily loans, require a minimum net worth equal to the loan amount. As with post-closing liquidity, this threshold can be met by several sponsors to achieve a combined net worth equal to the loan amount.

If you need a strong financial partner, choose one or two strong sponsors that altogether exceed the minimum net worth and liquidity requirements to join you – keep things simple for a new lender relationship to digest. Also, the more you exceed these thresholds the better. In the event that any issues arise during the diligence phase that would discourage lenders from proceeding with a weaker sponsor, you want to be in a position to mitigate risks by being in a strong financial position as a sponsor or sponsors.

Tip #2: You will need to address experience and the lack thereof.

On your first deal, you definitely want to highlight your single-family rental experience, if any, and any real estate experience you may have.

Work on your bio – not many people do it but it adds a lot of value when building new relationships with lenders. It doesn’t need to be long; maybe half to full page. It should focus on your real estate experience, including number of properties AND units sold, number of properties and units currently managed, including any that you might manage as a third-party, and any real estate jobs you may have had before or while investing in single-family rentals. Disclose all real estate associations in which you participate.

Tip #3: Prepare an Executive Summary describing your transaction

If an acquisition, you should clearly demonstrate why you like the property and the submarket. Explain how your property compares to others in the submarket with respect to age and condition, unit mix, amenities, asking rents and collections. Are there any inefficiencies in the operations that you can improve? If so, what are they and how will you accomplish them? Are expenses high and above market? If so, how do you intend to bring them in-line with market? What are your objectives for improving the property? Do you plan any improvements? If so, do they translate to rental increases or are they related to curing deferred maintenance?

If you are refinancing a multifamily property that may have been financed by a different lender, describe what you have done to improve the property since acquisition. Keep a detailed record of all capital improvements – what and how much. Separate non-recurring capital expenditures from operating expenses. Keep records of rental increases and collections to show trends over time. If you performed capital improvements in-house and used your own labor to do so, document how much time was spent and at what rate so that you can back that out of operating figures.

Tip #4: Have a pro forma prepared

This should be a realistic pro forma that is in-line with the market. Provide supporting information as to how you intend to raise rents and/or decrease expenses. Are utilities high for a particular reason? Is payroll unusually high? Are collections not being enforced? Are non-paying tenants allowed to stay? Will you be able to raise rents by making upgrades to the units? Remember to be sure your in-line with the market. Brokers, lenders and appraisers are good resources for such info.

Tip #5: Have your personal financial statement and schedule of real state up to date, accurately disclosing your net worth and all liquid assets.

Be sure to identify retirement funds that are in an IRA or 401k. I can provide you with templates upon request.

Tip #6: Identify a third-party property manager to manage the property for you.

One way to mitigate the lack of experience is to engage an established and reputable third-party property management firm. While you do not need to decide who that will be when you apply for a loan, you should have two or three options to present to a lender. This, together with the items listed above, will demonstrate that you are thinking things through and intend to enlist help from experienced individuals.

Tip #7: Try to stay close to home

A first-timer buying a property in another city or another state is a big challenge for many lenders to overcome, so you need to present a clear strategy as to how you will manage that property in order to overcome this objection. It’s doable, but you’ll have to demonstrate a strong understanding and a strong plan.

Tip #8: Know your transaction and identify lenders ahead of time

One last tip, know your target transaction and identify a list of lenders to contact. There will be different lenders for different transactions. There’s not much to do with lenders until you identify a property but I always encourage buyers to connect with me sooner than later so that we get to know one another. It is a good idea to develop relationships with lenders so that when you do identify a property for acquisition, you’re one step ahead in the process and you have lenders who know who you are. The financing process takes time, so bring your lender in ASAP. You want to start talking to your lender as you start evaluating the property – not after you go under contract.

I want to hear from you. Did you find this article useful? If so, please share it. Let me know if you have any questions or if I can elaborate on any of these tips.