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Unless you’re buying a multifamily property with cash, you’re going to need to finance that property. Many buyers will find themselves in this position, some may actually know how to get approved while others are new to the industry and will have difficulty getting the approval that they need.

If you need financing and are new to multifamily, or are looking for tips that you can use to get approved, this article will provide you with tips that you need so that you will hear those magic words “you’re approved!”.

What’s Needed from You

When applying for a multifamily loan, the first thing that’s needed from you will be information concerning you and your own personal finances. These documents must be given to your lender right at the moment that you have received a signed purchase contract.

Besides needing information about your finances, the lender is also going to need the following:

  • Completed loan application.
  • Two years’ worth of your personal income tax returns, including any tax schedules.
  • Schedule of any real estate that you currently own.
  • Your escrow information
  • Type of ownership entity that you plan on closing with. This should include information if you plan on closing with an LP or LLC.

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Information That Will Be Needed Regarding the Property

Within days of signing the contract, you must be prepared to present to your lender the following information about the property including:

  • A copy of the purchase contract.
  • Two years’ worth of operating statements. These statements should include income and expenses plus profit and loss.
  • Rent roll – This information should include start dates/end dates of each lease, name of the tenant, square footage of the unit and of course the amount of each rent.
  • Title report – This document can be ordered from the escrow/title company.
  • Photos of the property – These pictures should include pictures of the property from all angles including the north, south, east and west.

What Lenders Are Really Looking for In A Deal

Even though we all visualize a lender smiling as they tell us that we’re approved when purchasing a new multifamily property, the reality is that it’s not always that easy.

In order for you to get a lender to tell you that you’re approved, you must know what a lender is really looking for in a deal.

  • Does the property have good cash flow? Cash is always king so if a property is located in a less than desirable neighborhood, or you have a low credit score, you have to remember that if the property cash flows well, the owner may be willing to overlook some negatives as they focus on the positive aspect of cash flow.
  • What is the purchase price? Your lender is always going to follow the “metrics” of a good deal including if you’re buying the property low because this also means that your debt is going to be low too and your debt coverage ratio is going to be higher.
  • Is there a strong operating history? Some multifamily buildings have a strong operating history and have been part of the community for years. Lenders love buildings that have a low vacancy and increasing incomes so if this matches the property that you’re buying, you shouldn’t hesitate to bring it to your lender.

Here’s What Lenders Really Do Not Like in A Deal

Now that we’ve discussed what lenders are looking for in a deal, let’s talk about what they don’t like in a multifamily deal.

  • There is insufficient financial data – The property may be in a great location and have an awesome rent roll but if the seller can’t back up their financial claims with real data or records, your lender is going to skeptically view your request for a loan and deny it.
  • The financial records have discrepancies – Another thing that creates a “red flag” for most lenders is if the financial records have discrepancies. This means that if the seller lists income for the property at X for one year but their tax returns show Y. If the seller is showing less taxable income than they originally claimed, the lender is going to wonder which document should the believe?
  • Hidden or deferred maintenance – Last of all, most lenders typically turn down loan applications on buildings that have hidden or deferred maintenance. They do this because they don’t like to find out at the last minute that the building needs repairs and finding out that one aspect of the property needs repairs is going to lead them to question the structural integrity of the rest of the property.

How to Choose the Best Loan for You

We’ve covered a lot of information so far that you will need to know if you want to successfully get approved for financing. The next part of the process is for me to provide you with a blueprint for choosing the best loan for you.

In order for you to choose the best loan for multifamily property, you have to research multiple banks or lending institutions in the area which may include the following:

  • Commercial Banks – Most commercial banks tend to only lend locally. They do this because they want to feel that they are making a significant impact in the community so the closer the investment property is located to their door, the better.
  • Savings and Loan Banks – Like commercial lenders, savings and loan banks also tend to just lend locally. The good news about working with this type of lender is that they are many times more flexible with the down payment requirements and will do everything they can to help you close the deal.
  • Mortgage Brokers – A mortgage broker is typically a “middleman”, they will take information about the property that you want to buy then shop it around to banks and other institutions until they find the right backer.

When choosing a lender, make sure that you do your “homework” on them and verify their experience including if they offer excellent service to you or not. It’s vital to determine what a lender is capable of doing and can’t do because some lenders only may write loans within their state while others cover every state so it’s important to verify this before moving forward.

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Lessons Learned

Yes, there may be a lot involved initially with finding and choosing a lender but the hard worth is worth it! Just make sure that you also are aware of their fees and or pre-payment penalties because those fees can eat thousands of out of your bottom line each year so it’s best to be fully prepared by doing the hard-investigative work before buying a multifamily property.

Erik Hatch

Erik is currently invested in projects in Florida, Texas and Kentucky totaling $79 Million. He is an accomplished leader who motivates and inspires action while at the same time, is grounded in business metrics and information that drives successful businesses.