If you’re considering investing in a multifamily property, financing is likely to be one of your top concerns. Multifamily properties are typically more expensive than single-family homes, and the financing options available to investors can be more complex.
In Part I of this article, we’ll cover two common financing options: loans and equity financing. We’ll explain how they work and their pros and cons.
Investor covers 60-80% of property purchase with Loans
These loans are typically issued by agency lenders, such as Fannie Mae or Freddie Mac, or by institutional financing organizations like banks. These loans are often referred to as “conventional” loans because they adhere to the guidelines set forth by Fannie Mae or Freddie Mac.
Loans for multifamily investments are structured like traditional mortgages, but there are key differences from single-family home loans. The main differences are the underwriting process, which involves more complex financials, and the amount of the loan. Single-family home loans are usually limited to the purchase price of the home or the appraised value of the property, whichever is lower. In contrast, multifamily loans are typically larger, covering 60-80% of the purchase price of the property.
Multifamily loans may also have higher interest rates and fees due to the higher risk for lenders. However, loans remain a popular financing option for multifamily investors because they allow them to leverage their investment and generate cash flow while building equity in the property. It’s important to carefully consider the terms and conditions of any loan before signing to ensure it aligns with investment goals and financial situation.
Despite these differences, the basic structure of a multifamily loan is similar to a traditional mortgage. The borrower makes monthly payments that include both principal and interest, and the loan is secured by the property itself. If the borrower defaults on the loan, the lender may foreclose on the property and sell it to recoup their losses.
Overall, loans are a popular financing option for multifamily investors because they allow them to leverage their investment and generate cash flow while building equity in the property. However, it’s important to carefully consider the terms and conditions of any loan before signing on the dotted line to ensure that it aligns with your investment goals and financial situation.
Investor covers 20-40% of property purchase with Equity Financing
Equity financing involves raising money from investors in exchange for a share of ownership in the property. This can be done through syndication, family offices, private equity funds, pension funds, insurance companies, real estate investment trusts (REITs), and other institutional financing companies.
Syndication is a popular option for raising equity because it allows investors to pool their resources and spread their risk across multiple properties. Private equity funds and pension funds can also be attractive options because they often have large amounts of capital to invest and can offer favorable terms.
Syndication can be an attractive financing option for multifamily investors because it allows them to access larger deals than they might be able to on their own. It also allows investors to diversify their portfolios by investing in multiple properties with different sponsors. However, syndication can also be risky, as investors are reliant on the performance of the property and the expertise of the sponsor. It’s important to carefully vet the sponsor and the deal before investing in a syndication to ensure that it aligns with investment goals and financial situation.
Family offices are private wealth management firms that serve ultra-high-net-worth individuals and families. They offer a wide range of services, including investment management, estate planning, tax advisory, philanthropic planning, and other customized solutions. Family offices can act as equity investors in multifamily properties, providing financing through direct investment or syndication. They can also provide preferred equity, which is a hybrid form of financing that combines elements of equity and debt. Family offices are often attracted to multifamily investments because of the potential for stable cash flow and long-term appreciation. They can also offer valuable expertise and network connections to help investors achieve their financial goals.
Private equity funds are investment vehicles that pool money from accredited investors, such as high-net-worth individuals and institutional investors, to invest in private companies or acquire control of public companies and take them private. Private equity funds are typically managed by professional investment managers who are responsible for making investment decisions on behalf of the fund. They generally have a longer-term investment horizon compared to traditional public market investments, and they often seek to improve the operations of their portfolio companies to generate attractive returns for their investors. Private equity funds also have a reputation for being higher-risk, higher-reward investments, and they often use leverage to enhance returns.
Pension funds are investment funds that manage the retirement savings of employees from public and private sector organizations. These funds are typically managed by financial professionals and invest in a variety of assets, including stocks, bonds, and real estate. The goal is to generate returns that will fund the pension payments to employees when they retire. Pension funds are typically long-term investors and may have restrictions on the types of investments they can make, such as a limit on the amount of risky investments.
Insurance companies are organizations that provide financial protection to individuals and businesses by offering insurance policies that cover various types of risks, such as property damage, liability, illness, and death. Customers pay premiums in exchange for the insurance company’s promise to pay for losses or damages covered by the policy. Insurance companies invest the premiums they collect to generate income and ensure they have sufficient funds to pay out claims. They also assess and manage risks to maintain their financial stability and solvency.
Real Estate Investment Trusts (REITs) are companies that own and operate income-generating real estate properties, such as apartment buildings, office buildings, shopping centers, and hotels. They allow investors to invest in real estate without actually buying property themselves. REITs receive special tax considerations and are required to pay out at least 90% of their taxable income as dividends to shareholders. REITs can be publicly traded on stock exchanges, making them accessible to individual investors, or privately held. They offer an opportunity for investors to earn regular income from real estate investments and benefit from potential capital appreciation.
Interested in learning more about financing your multifamily investment? Our team of experienced professionals can help you explore your options and find the right financing solution for your needs. Contact us today to schedule a consultation and take the first step towards building your real estate portfolio!