Let’s talk about getting loans for your multifamily deals. Here is a rule of thumb: the easier a it is to get a loan on a deal, the less money you will make. There are many different types of loans. The easiest one to get is a residential loan, which is 1 to 4 units and you must live in one of the units. For this discussion, a house isn’t considered an investment simply because it doesn’t produce cash flow. If we contrast a house, you will have a down payment, pay PMI or private mortgage insurance and an interest rate based on your personal credit score, your debt, employment and other factors. To get that loan, you have to prove that you personally have the cash flow to afford the debt on the house because the bank doesn’t consider it an income producing investment.
The opposite is true on an income producing property, like multifamily. Picking and investing in the right multifamily deal is one of the most important things you’ll do starting out. Structuring the right equity, debt, getting a good rate and cash flow on your deal is incredibly important. In this case, your biggest partner on the deal is the bank because they are usually putting up 60 to 80% of the debt on the deal depending on how you structure it. So, financing is extremely important. You need to know financing and the various ways on how to get the deal done because it costs you money. A difference of a only a quarter of a point in interest on a large deal can mean paying hundreds of thousands of dollars more per year. Many times a bank will offer an interest-only loan at a certain percentage above Treasury rates when financing these types of deals. You’ll need to compare rates to find the best one and length of term for your situation.
Another thing to make sure you line up the equity side, or your down payment. Unlike buying a house, you don’t want to pay the principle down. The objective is all about how much money you can cash flow on a monthly basis. As the land value appreciates and rent increase because you are driving appreciation in the property, you still get cash flow. The cash flow covers the debt payment and gives you passive income. There is no upside in paying more to bring drive the debt side down. With that said, I like to do long amortizations as I want to reduce the monthly payment and maximize cash flow. This will vary on the type of loan and what the bank is willing to do on the property. And if you are working on a larger deal, you should spend more time negotiating rates and terms with the bank.
Here are the 3 things the bank is going to look for when they are considering your multifamily deal:
1. First, they are going to look at your net worth, which includes liquidity and assets.
2. Then, they will look at your credit. They will be looking for lates, bankruptcies and other blemishes.
3. Finally, they will look at your track record and experience in buying and managing real estate.
To get started, you need net worth and liquidity. Whether you have it yourself or you lean on partners that have the liquidity and net worth. This means partnering with experienced syndicators that have done multifamily deals in the past or have a foundation in good sized commercial real estate.
Then, make sure your credit is in good shape. There are many credit repair companies out there that will work to get rid of the tradelines impacting your score. If you know your credit is lacking, I’d suggest you start on that today so you can be ready when you find a deal.
And for your track record, you can lean on your property management company. If you can find a company that manages many units, they have a good reputation and are easy to work with, you will be good.
Anyway, let me know what you think. Do you have any lenders, credit repair or property managers you’d like to recommend in your area? Leave them in the comments.
And if I provided value, please share.