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Investing in rental properties can be a lucrative way to increase your portfolio and maximize profits. But how do you finance a multifamily building? One option you may be considering is a multifamily apartment loan.
Apartment loans are specifically designed for investors who want to purchase commercial housing when they might not have the money. This post looks deeper into apartment loans for multifamily housing investments. We go over what multifamily financing is, the types of loans for apartment buildings, and a few alternatives.
Below you’ll discover:
- What is multifamily financing?
- What is a loan for an apartment called?
- Is an apartment a good investment property?
- Benefits of apartment loans
- Alternative apartment financing strategies
What is multifamily financing?
Multifamily financing is the term used to describe financing for someone to purchase or invest in multifamily housing, such as apartments and condos. Multifamily financing, namely loans from banks and other financial institutions, is what makes it possible for most investors to purchase large properties.
Financing for multifamily housing often comes from loans like FHA loans, CMBS, and more. However, the exact loan you choose will be determined by several factors.
These factors include:
- The current stage of the real estate cycle.
- Where the property is located, specifically the city and state.
- The financial history of the investor.
- What you plan to do with the property you buy.
What is a loan for an apartment called?
In order to finance your multifamily investment, you likely need to take out an apartment loan. But where do you start? There are many different types of apartment loans for investors, each with its own benefits. Let’s take a closer look at three of the most common multifamily loans.
Three types of loans for apartment buildings include:
1. FHA apartment loans
FHA (Federal Housing Administration) loans are a creative way to finance real estate purchases. This is perfect for investors who don’t have the capital or the time to build commercial housing from the ground up.
Keep in mind: FHA apartment loans have a time-consuming approval process. Additionally, they may also have high-interest rates that may not match your budget.
2. Apartment construction loans
Is your dream to flip existing apartment buildings or build something completely new? If so, there are a couple of apartment construction loans you can apply for.
Two multifamily construction loans to look into include:
- Balance sheet loans. These loans are typically more flexible, more affordable, and customizable. Lenders also aren’t required to yield to Freddie Mac, Fannie Mae, or FHA guidelines. However, you’ll need to communicate with lenders for specific information regarding interest rates and more.
- Conventional construction loans. A conventional construction loan often has a lower interest rate and flexibility but larger loan amounts. To obtain a conventional loan for construction, you must create a business plan, contact a lender, and fill out an application.
Learn more about commercial real estate development:
3. CMBS loans
Commercial Mortgage-Backed Securities (CMBS) loans are backed by a collection of commercial property loans. So, these loans are similar to other mortgage-backed securities — without the backing of residential mortgages.
When a borrower wants a CMBS loan, the loan is pooled with others and sold to investors as bonds or securities. The investors receive a share of the income generated by the properties. Then, the borrower receives financing for the apartment construction.
Is an apartment a good investment property?
Most multifamily properties do have the potential to be a sound investment as they generally provide stable income and may see appreciation in capital over time.
Moreover, many factors can indicate the investment potential of a property. But because no single experience is the same, you’ll need to keep a few things in mind.
Factors that go into investment property viability:
- The payment amount for the building or property.
- Location of the building you want to invest in.
- Overall multifamily operating costs required by the property.
- Current status of the rental market.
Researching these factors before applying for a loan can impact your investment’s success.
Benefits of apartment loans
Weighing the benefits and risks of taking out an apartment loan is the best way to decide whether to go forward.
Benefits of apartment loans include:
- Readily available access to capital. Compared to single-family loans, multifamily loan amounts are generally larger. Consequently, more capital could help you invest in larger multifamily properties.
- Long-term investment opportunities. Investment longevity is the very nature of multifamily housing. In simpler terms: multifamily properties have longer lease terms than other real estate investments. So, there’s more opportunity for investments to pay out for longer.
- Advantageous loan terms. Apartment loans have more favorable terms because they have longer repayment agreements as well as lower interest rates. As a result, they’re more affordable than other real estate investment loans.
What is one of the biggest risks of investing in a rental property?
One of the significant risks when applying for a rental property loan of this scale is the vacancy risk. The reason is that when a property remains vacant, the owner takes on the mortgage expenses, property taxes, and so forth — making a reasonable ROI on a real estate investment difficult to achieve.
The best way to minimize vacancy risk is to have fair rental rates, maintain the property well, and appeal to tenants.
Alternative apartment financing strategies
- Private money loans. If you feel good about your plan, you may be able to partner with private investors who can help you finance your project. Keep in mind that private loans usually have higher interest rates.
- Hard money loans. With hard money loan financing, private lenders don’t look at your credit or your worth. They’re more focused on the potential to bring in revenue for the property in question. To secure a hard money loan, you’ll have to find a lender who thinks your renovation plan is worth it.
- Equity financing. If you don’t mind sharing ownership in order to invest in a property, then equity financing may be for you. With equity financing, investors get their financing by pooling funds and investments without ever taking out a loan.
Takeaways
- The best way to finance an apartment building is to take out an apartment loan.
- There are three types of apartment loans: FHA, conventional construction, and CMBS.
- Factors that determine investment property viability include property value, building location, overall expenses, and the current status of the rental market.
- The benefits of an apartment loan include access to capital, long-term investment opportunities, and advantageous loan terms.
- Risks of a loan include long reselling time, market risks, and maintenance costs.
- Alternatives include private money loans, hard money loans, and equity financing.
