Multi-family properties are expensive, and generally you’d think twice before making the decision to buy one in Burbank. It could be because you family is expanding, or you could be thinking of jumping onto the bandwagon of multiple income stream. Well, hello and welcome on board! Nothing is more rewarding than rental income from a multi-family property. You’ll find out soon enough that these properties are owned by real estate investors, and they know where to find the financing. But since you’re new to multi-family properties, you need to learn a few things about the different methods of financing one. Allow us to enlighten you.
The Conventional Mortgage Method
Conventional multi-family mortgages are considered ‘conforming’ loans. This is because they follow Fannie Mae’s (Federal National Mortgage Association) required specifications regarding the loan amount and other details. The federal government does not back these loans, and they are usually considered permanent. You can easily avail them through regular banks and various other lending institutions. They are best for investors who are aiming to purchase a building with about 2-4 units.
The down payment is typically 20% or more. The loan amount varies depending on the area. Generally, however, the loan can be a minimum of $500,000 for a 2-unit property up to $1.2 million for a 4-unit property. The interest rate can vary between 4.5 to 6.5%. The term for the loans can be anywhere between 15-30 years. This makes them optimal for individuals searching for long-term loans. The loans usually require a credit score of 680 or above.
The Government Loan Method
Yes, Uncle Sam does offer some incentives for the public to invest in large and expensive properties. After All, you’ll be paying more taxes to him! For this reason different government agencies such as Fannie Mae and the Federal Housing Association (FHA) sponsor mortgage like loans. These loans are handy for investors like you, who plan to live in one unit and rent out the rest. Depending on your choice, you can finance properties ranging from 2-4 units and even properties with five units or above. Approved mortgage lenders, such as the Commercial Real Estate Finance Company of America, are allowed to offer multiple financing options for multi-family properties.
The down payment is usually 3.5% or above. For 2-4 units, the amount can vary between $500,000 to $1.2 million. For five units or above, Fannie Mae offers $750,000 to $3 million or above. Freddie Mac, on the other hand, provides $1 million to $6 million. The interest rate is typically between 5-7%, but it can be higher. The period for the loan can vary between 5-35 years. The required credit score needs to be 650 or above to avail the loans. There are many more technicalities which you should thoroughly go through before availing this type of loan.
The Portfolio Loan Method
These loans are nonconforming and can be used to purchase any property with two units or above. Like the others, they are also permanent loans. Portfolio loans are perfect for investors who do not meet the requirements for a conventional multi-family mortgage. They are also optimal for people who want to finance multiple properties at the same time. Since the loans do not conform to Fannie Mae’s standards, a large variety of lenders can offer them through a portfolio. Lenders can range from traditional banks to credit unions.
If you’re thinking of portfolio loans then note that the down payment is 3% or above. The minimum loan amount is $100,000. It can go up a lot more depending on the lender and institution. The interest rate is typically 5-6%. The complete loan term can be anywhere between 3-30 years, and you’d need a minimum credit score of 600 or above to avail the loan.
The Short-Term Financing Method
These loans are a little bit different from the rest. They are not permanent and include both hard money loans and bridge loans. In simple words, hard money loans are used by investors in the purchasing and rehabilitate properties that are distressed. Bridge loans are short-term flexible loans. These multi-family loans are for investors who wish to renovate a multi-family property to meet the requirements of a permanent loan. If you’re a landlord with multi-family property, out looking for financing to upgrade or buy more then this is a good option.
The down payment is a bit high as compared to others set at 10% or above. The loan amount depends upon the lender, but the bare minimum is $100,000. The interest rates range between 7.5-12% for hard money loans and 5-12% for bridge loans. The term for this type of financing is short, ranging from 6 months to about three years. Your credit score needs to be at least 550 to avail these loans. Bridge loans, however, usually require a credit score of 640 or above.
Take Your Pick
Before you go out shopping, it is important to note that these are general estimations. Actual rates, minimum down payment, credit score requirements and other details vary depending on your situation, the type of property you choose and locality. Someone planning to purchase a multi-family property in Los Angeles will be evaluated differently than for example, in New York due to regulations, pool of investors, and institutions.