Investing in apartment or multifamily housing can be a risky venture if you’re unprepared for the responsibilities and costs that come with it. Finding a financing package is one of the most important steps you can take towards maximizing your returns. With different funding and underwriting rules than a traditional single family home, apartment building financing can unfortunately be a long and cumbersome process. However, with a little research you can help educate yourself about your financing options in order to become a more savvy investor.
Both multifamily and single family property loans require you have good credit and can be purchased in 5 to 30 year terms. However, in order to qualify for multifamily home financing, the building itself will need to meet certain requirements. It must include five or more units; if there are both residential and commercial spaces in the building, over 80 percent of them must be dedicated to residential use. Rooms cannot be rented daily or weekly, and the property must have been at least 85 percent of rooms occupied for at least the last 90 days before the loan application. Multifamily housing can be an expensive purchase, so your investors need assurances that you’re on a path to success with this property.
The loan can be assumed multiple times over its term, meaning that sometimes when you buy a building you also have the opportunity to assume the existing mortgage. Apartment building financing limits the lender’s options at recourse if you default on the loan, protecting your personal assets. Additionally, repayment costs can be huge, sometimes up to 20% of the loan balance. To avoid getting hit with these fees when you sell a property, it may be beneficial to attempt to transfer the mortgage to the buyer. If that is not an option, you have the ability to “defease,” which requires you to substitute a similar property as collateral while keeping the existing mortgage open and available for the acquisition of new property. There are also fees for defeasance, as well as yield maintenance fees if you sell and do not transfer or defease the loan.
Even though multifamily or apartment housing properties are classified broadly as residential loans by a lender, these loans are structured in ways that are more similar to business loans. These discrepancies are designed to absorb some of the unique difficulties of having such a large mortgage as well as eliminate potential negative impacts to your personal assets. Educating yourself about the differences between multifamily and single family home financing options is your first step towards understanding the benefits and limitations of your apartment building financing options.