All Forum Posts by: Darryl Dahlen

Looking back at the last 5-6 multifamily loans I've funded the terms have had rates in the 4-5% range, 7-20 year term, with 30 year amortizations and LTVs in the 70-75% range. I only closed one at 80%, but that's typical in this market. Loan amounts ranged from $1-12MM and all loans were non-recourse.

Closing costs will vary depending on the lender you use and loan amount. A local bank can generally give you lower closing costs, but don't expect a 30 year amortization or non-recourse loan.

A more sophisticated lender (CMBS, direct lender or an agency lender) will have more reports needed than a bank, could charge you for legal, and underwriting, but the terms are usually better.
It's hard to give you an answer on closing costs without a general dollar figure. FWIW, I consider a medium loan to be in the 1-5 million range.

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I agree with the responses. Any equity above and beyond the purchase price will benefit the lender on a purchase, not you.

Building multifamily units isn't for the faint of heart as it generally requires more capital, reserves, and experience to obtain financing. The loan process is much more involved compared to a purchase and there tend to be a lot of "hiccups" during the loan process. There is also a LOT more legwork on your end getting the property entitled/permitted, renderings, budgets, etc. before you even start the process. 

So the purchase price was $125,000 and you had an issue with someone making $1750? I could see you having an issue if the loan was higher, but 2% on a loan that's under $100,000 loan is fair.

How are you getting 5.125% fixed for 30 years on a commercial product? That sounds like a residential loan.

Credit unions tend to be very relationship driven and shy away from absentee borrowers. If you're local to the property they can be a good option.

A 4-plex is not a commercial loan as it will be zone residential. 5-uits and more are considered commercial, but to answer your question the primary difference between the two loans is that a residential loan is based on your income to qualify for the loan where a commercial loan is based on the property's income.

In short, the path to success when buying multifamily properties is build in having a strong infrastructure. You will need a GOOD property management firm to manage the property so find one that is reputable before you start looking for a property. Find one that preferably has an established network of contractors, plumbers, electricians, etc. in place that are used on other properties they manage so you don't need to find those people yourself.
Secondly, you'll need a good layer and accountant. The larger the property you get into the more important these two people are, but for a 20-unit you'll certainly benefit from having a good lawyer and accountant on your side.

Get your finances/money in order BEFORE you look for a property. You won't have time to deal with this once you start looking for properties so make sure your PFS, tax returns, and funds needed to pull the trigger on the deposit and closing are in place.

I don't concur with Kim Younkin on getting pre-approved for commercial financing as there really is no such thing. Commercial loans are based on the income of a property, not yours, so a lender has no way to pre-approve you for a loan if there are no financials to analyze. 

You can, however, talk to local banks to get an idea of what kind of terms they'd offer on a 20-unit. They'll tell you what their likes and dislikes are for things such as the market, needed occupancy level, tolerance for deferred maintenance, etc.  

The more you know about what a lender(s) will or will not allow will give you a rough idea when looking at a property if it is bankable or not. In order to get a term sheet from a lender you will need to put a property under contract and obtain rent rolls and historical financials though.

In my experience, where people fail the most is trying to bite off more than they can handle either from lack of money, lack of experience, or both. Everyone wants to hit a home run when it comes to multifamily, but it's easy to fail as a property can easily go "off the tracks" when you lack experience or the funds to keep deferred maintenance issues from building up.

Find a property that works for you both in terms of financially and physically and remember that this is your first big multifamily purchase, not your last.

Your description of how the purchase process works is pretty spot on. As to how to structure the company, that is in large part up to you, but the lender may also have some input.

Generally speaking, since you are raising the down payment you would give up some ownership percentage as well as a profit sharing percentage. You could give up say 2% ownership for every $10,000 invested and a preferred 7-9% equity stake, but it's really up to you on what to offer.

Keep in mind that anyone with more than a 20% ownership stake is likely to be required to become a guarantor on on the note. 

You'll also probably want to be the sole managing member and make the investors minority partners, but again, you can do anything you want so long as the the investors agree and the lender approves.