Before you purchase your first multifamily, you should ask yourself 3 questions to determine what type of loan you can qualify for:
- Is the property stabilized (yield play) or distressed (value play)?
- What is your ownership experience with multifamily (5 units and above) real estate?
- What is your net worth and liquidity?
Let’s take these questions one by one.
1. Is the property stabilized (yield play) or distressed (value play)?
Stabilized property characteristics:
- At least 90% occupied for the past 90 days
- No major rehab needed (less than $5,000/unit)
- Clean and accurate historical financials to show consistent income/expenses (no large income or expense swings)
Distressed property characteristics:
- Under 90% occupancy for past 90 days
- Large rehab needed (more than $5,000/unit)
2. What is your multifamily ownership experience?
- At least 12 months on multifamily ownership. Managing member or guarantor on multifamily property (5 units or more)
- No experience, but a lot of enthusiasm
3. What is your net worth and liquidity?
Net worth must be equal to or greater than the loan amount.
Liquidity must be a minimum of 10% of the loan amount in cash or marketable securities not including the down payment.
Assuming you meet the net worth and liquidity requirements:
- Stabilized Property + Experienced Operator= Non-recourse loan (Agency or CMBS)
- Stabilized Property + New Investor= Recourse loan (Bank)
- Non-stabilized Property + Experienced Operator= Recourse loan (Bank)
- Non-stabilized Property + New Investor= Recourse loan (Bank)
Typical Non-Recourse Loans terms:
- 75-80% Loan to Cost
- 5 or 10 year term
- 30 year amortization
- No personal guarantee of loan shortfalls
Typical Recourse Loans terms:
- 70-75% Loan to Cost
- 5 year term
- 20 or 25 year amortization
- Personally guarantee any loan shortfalls