The past decade has been great for real estate investors, especially those who flip properties. However, recent market conditions have led investors to turn to multifamily properties instead of single-family. If you’re new to the world of multifamily properties, there are some things that you must understand as you start considering multifamily financing.
Multifamily Property Defined
In case you are new to the world of multifamily properties, there are a few terms that you need to be familiar with:
Multifamily property, also known as a multi-dwelling unit- or MDU- is a property/homemade up of 2+ units on a single parcel of land under one common title.
Properties with 2 to 4 units are residential, while 5+ units are commercial property.
It is important to note that commercial versus residential is critical when it comes to multifamily financing.
What to look for in investment property
If you’re familiar with multifamily investing, you know this but if you’re new, it’s important to know what you should look for in a multifamily property. There are three factors involved:
Net operating income
Finding Multifamily Financing
As mentioned, multifamily properties are classified based on the number of units. The type of funding available and requirements for approval are different. As a general rule, the same financing sources are available for multifamily as for single-family properties- but there are a few creative options as well.
Creative Options for Multifamily Financing
Below are some of the more creative options when it comes to multifamily financing.
Equity Share Investor
This is a real estate investor that will own equity in exchange for providing the funding for the purchase. They are entitled to a percentage of monthly cash flow and percentage of profits when the property is sold- based on the amount invested. This is often used in conjunction with traditional financing.
Real Estate Syndication
This can take on several forms. It is a pooling of funds that are used to provide investment property financing. The most common forms are:
Real estate partnership
Real estate crowdfunding
Borrow from Hard Money or Private Lenders
Hard money lenders focus on the earning potential of a multifamily investment property- not the credit history of the borrower. This is a great option if you’ve had credit issues in the past.
This is a non-conforming loan that you can use to purchase a multifamily property. This is a great option for those who want to finance several properties at once.
Multifamily Short-Term Loan
A short-term loan to finance the purchase of a multifamily property offers terms of 6 to 36 months and payments are interest-only. These may be bridge loans or hard-money loans and investors turn to these when they need quick cash to make investments that allow them to meet the strict requirements of permanent multifamily financing.
Pros vs. Cons of Investing in Multifamily Property
As mentioned previously, current market conditions are leading investors to consider multifamily financing. However, it’s important to understand that there are advantages and disadvantages to keep in mind. Below are the pros and cons of investing in multifamily properties.
Cash flow: more units equal more rental income- plus, you can save money by living in one.
Control overvalue: the more income the property brings in, the higher the value. You can make upgrades that increase the value, which means higher rent.
Less risk: multiple tenants means risk is spread out. You don’t lose out entirely on rental income when one unit is vacant.
Scalability: purchasing just one property gives you 2+ units.
Cost: generally, a multifamily property is more expensive than a single-family. Investors need more cash, which means you must be creative for multifamily financing.
Appreciation: a multifamily property is valued on the income it produces and the condition of the property. Therefore, they appreciate slower than single-family properties.
As you can see, there are pros and cons to multifamily investing. Due to the current market conditions, you may find this is a great time to take the plunge. That being said, be sure to contact BT84 Commercial Capital & Business Solutions for help with your multifamily financing needs.