Are you planning on buying your first multifamily property? If so, unless you plan on paying for that property with cash, you’re going to need financing.
In this article, we will share with you our tips for financing multifamily deals including some creative financing tips.
Option #1 – Owner-Occupant Loans
Thanks to the Government, real estate investors have more financing options to choose from than ever before including FHA loans. With this type of loan, if an investor plans on living in one of the multifamily units they can get an affordable FHA loan with as little as 3.5% down. This is significantly less than traditional mortgage loans.
Besides FHA loans, another owner-occupant loan that investors should consider is a VA Loan if they are an active, reserve or former member of the Armed Forces. With a VA loan, an investor doesn’t have to pay mortgage insurance, there isn’t a credit requirement, no down payment and they may even be able to purchase the property with little to no closing costs as well.
Option #2 – Conventional Loan
A conventional mortgage loan is one of the most common financing options that investors will choose for purchasing investment properties.
With a conventional loan, you have to have a fairly good credit score in order to qualify. These days many lenders are willing to consider credit scores that are as low as 580 but for most lenders, you have to have a credit score of 700 or higher in order to qualify for financing.
Not sure if your credit score would be considered good or bad? You should purchase your 3-in-1 credit report online then use this convenient chart to determine if your credit score would be considered to be good, bad or poor.
Bad Credit: 300-600
Poor Credit: 600-649
Fair Credit: 650-699
Good Credit: 700-749
Excellent Credit: 750-850
Depending on the multifamily investment property, you may be able to use the rental income from the property to qualify for a mortgage loan. In this case, you will be required to submit signed lease agreements from the tenants who are living in the property so that you can show the lender that the income from the property is secure.
Option #3 – Seller Financing
Let’s say that you’re unable to qualify for a mortgage loan, one option would be to find out if the owner of the property would be willing to consider seller financing. This financing option occurs when the seller of the property essentially becomes the “bank” and you will make your payments directly to them.
Before considering seller financing, make sure that all of the details of the financial arrangement are in writing. You should also thoroughly research the seller before entering into an agreement with them because you don’t want to say yes to working with a multifamily seller who has burned other investors before.
Option #4 – Partners
Working with partners isn’t for every investor but in a situation where you really want to purchase an investment property, and you don’t have the capital, choosing to partner with an investor may be one of your best options.
Before partnering with an investor, you should research them thoroughly and ask them to provide you with proof that they are an accredited investor because you want to make sure that they have the funds necessary for the transaction.
Obviously, partnering with an investor also means that you will have to be willing to give them a percentage of your profits from the investment property so it’s best to tread carefully before moving forward with a partner.
Option #5 – Crowd Funding
Thanks to the Internet, another fantastic option for financing a multifamily property is crowdfunding and there are many crowdfunding platforms to choose from including sites like Fundrise, Real Crowd, Crowd Street and Patch of Land.
The key to success before choosing a crowdfunding website is to read the terms and conditions of the website so that you verify the type of website that you’re going to be using to fund your real estate investment.
You should also research that crowdfunding platform online by reading the review written by actual users of that platform to confirm if it’s a service that you want to use or not.
Option #6 – Hard Money Loan
As with owner financing, choosing a hard money loan should also be your last resort as an investor because hard money loans typically come with much higher interest rates than traditional financing.
The term for a typical hard money loan can last for 2-5 years and these loans can be a great way for an investor who is unable to qualify for financing to get into an investment property, improve their credit then re-apply for a traditional mortgage loan in 12-24 months.
As an investor, you have a lot of options for financing a multifamily property deal so it’s best to consider all of your options and choose carefully before moving forward.
If you’re choosing a conventional mortgage loan, it’s best to pay close attention to your credit score because that can literally mean the difference between qualifying for a loan with an affordable interest rate or paying more money than you should during the lifetime of your loan.