Everything You Need to Know About Multifamily Loans For 5+ Unit Properties
For legal purposes, in the United States, multifamily properties with 5 or more units are considered commercial properties. This means that 5-unit multifamily financing options are significantly different than the loan options available for 1-4 unit properties. While 5+ unit multifamily financing options aren’t available for 1-4 unit properties, there are also several loan types available for 1-4 properties that aren’t available for larger apartment buildings. Some of the most common loans used to finance 5+ unit multifamily properties include bank loans, CMBS loans, Fannie Mae multifamily loans, Freddie Mac multifamily loans, hard money and private money loans, and HUD multifamily loans.
In this guide, we’ll discuss each of the main types of financing that investors can utilize for a 5+ unit apartment building, discuss their pros and cons, and help you understand your options when it comes to financing your first (or next) multifamily property.
What Loans Aren't Available For 5+ Unit Multifamily Properties
Before jumping into the types of loans available for apartment buildings, it’s important to understand what isn’t available. Generally, there is no such thing as using a residential loan for a commercial property. Nearly all types of home mortgages, including traditional bank mortgage programs, traditional FHA home loans, VA home loans, and Fannie Mae and Freddie Mac home loans, cannot be used for apartment buildings with 5 or more units.
Bank Loans for Multifamily Properties
Bank loans are one of the most common loans utilized for 5-unit multifamily financing. They can be somewhat difficult to qualify for, and generally require relatively good credit, some real estate investing experience, and a relatively high net worth. Most bank loans are full-recourse financial instruments, so if you default on your loan, the bank can attempt to repossess your personal property.
Typical bank multifamily loan terms include:
Size: $1 million to $50 million+
Maximum LTV: 75%-80%
DSCR: 1.20x+ required
Term: Up to 30 years
Amortization: Up to 30 years
Interest Rates: Fixed and variable rates are available, interest-only (I/O) options are also generally available
CMBS Loans for Multifamily Properties
CMBS loans can often be a good option for multifamily investors looking for loans of $2 million or more. CMBS lenders, also known as conduit lenders, are somewhat more flexible when it comes to borrower net worth, as they focus somewhat more on the asset rather than the borrower’s eligibility. Often, conduit lenders will approve loans for borrowers with net worths as little as 25-40% of the total loan amount and, in some cases, may overlook certain credit or legal issues as long as they don’t pose too much additional default risk. In addition, CMBS loans are fully non-recourse with bad boy carve-outs, which can be ideal for borrowers.
Size: $2 million+
Term: 5, 7, and 10 year-fixed year terms (variable-rate CMBS loans are rare, but exist)
Property Types: Multifamily, office, retail, industrial, senior living, student housing, hospitality, mixed-use, mobile home park, parking lot, industrial, self-storage (other property types allowed on a case-by-case basis).
Recourse: Non-recourse with “bad boy” carve-outs for situations such as fraud or intentional bankruptcy.
Prepayment: Defeasance or yield maintenance is generally required.
Leverage/DSCR: Generally 75-80% Max. LTV/1.20x Min. DSCR
Amortization: 25- 30 years
Debt Yield: Minimum 8.7%.
Required Reserves:
Replacement reserves
Taxes
Leasing costs and commissions
Property/liability insurance
Fannie Mae Multifamily Loans
Fannie Mae multifamily loans are a great option for well-qualified borrowers with a high net worth, a good amount of investing experience, and good credit. They offer some of the lowest rates and longest terms in the industry, as well as particularly high leverage (up to 80% LTV for qualified borrowers) and DSCRs as low as 1.20x. Fannie Mae apartment loans can also be ideal for smaller-scale investors, as their Fannie Mae Small Loan program starts at only $750,000. Like CMBS, Fannie Mae multifamily loans are non-recourse, but unlike CMBS, they only finance multifamily apartments, senior living facilities, and mobile home parks.
Size: $1 million to $100 million+
Terms: 5-30 years
Maximum LTV: 75%-80%
DSCR: 1.20x+ required, as low as 1.00x for affordable properties
Term: Up to 30 years
Amortization: Up to 30 years
Interest Rates: Fixed and variable rates available, interest-only (I/O) options available
Freddie Mac Multifamily Loans
Freddie Mac multifamily loans are quite similar to Fannie Mae's apartment loan programs. Like Fannie Mae multifamily loans, Freddie Mac’s apartment loan programs are fully non-recourse with bad boy carve-outs. Much like Fannie Mae’s Small Loan program, Freddie Mac’s Small Balance Loan (Freddie Mac SBL) program starts at just $1 million and is ideal for smaller apartment properties.
Size: $1 million to $100 million+
Terms: 5-30 years
Maximum LTV: 75%-80%
DSCR: 1.20x+ required, as low as 1.00x for affordable properties
Term: Up to 25 years
Amortization: Up to 30 years
Interest Rates: Fixed and variable rates available, interest-only (I/O) options available
Hard Money Multifamily Loans
Hard money loans for multifamily properties are, by far, the easiest loans to qualify for, but they also have the highest interest rates and origination fees of any type of multifamily financing. Hard money loans are ideal for newer investors, those with more serious credit or legal issues, or investors looking to rehabilitate a highly distressed property.
Size: $100k to $5 million+
Maximum LTV: 55-90+% (more in some cases)
Loan Term: 6-36 months
Interest Rates: Generally 8-20%
Origination Fees: 3-5%
Interest Rates: Fixed and variable rates available, interest-only (I/O) options available