You can get the lowest rates, longer amortizations and make more money when you finance your multifamily properties through a Mortgage Banker providing CMBS Agency financing. Many investors think of going to their local community bank when they have a commercial loan, like an apartment building. The fact is that the community bank serves a valuable function in our national financial world. The local community bank knows their community and they develop programs to fit the need of the communities. As such they learn to be flexible in some areas of underwriting that present minimal risks in their communities and to be more stringent in areas of greater risk. This can be both good and bad. On the positive side the banks provide loans in there market that may not be done in other markets (sometimes in the same city). Negatively, like all mortgage lending only square pegs can go into square holes. If the need does not fit there is no loan. This is typically not a problem for multifamily properties with five or more units. The underwriting criteria is pretty uniform nationally. The big problem is resources. Local financial institutions have limited resources. In many areas there are apartment complexes yet the local lenders can not afford to finance them. Even many of the smaller complexes ranging in one to ten million dollars in value can not be financed because a small institution just do not have the resources to make these loans. The solution is a secondary market for commercial backed securities, specifically multifamily properties.
The Secondary Market
There are two ways that a secondary market for commercial mortgage backed securities (CBMS) are created. Large financial institutions like big banks, insurance and investment companies create, package and market CBMS on wall street. These programs are created to provide liquidity to the local banks and mortgage bankers, otherwise when they make a loan and lend out all of their money they can no longer originate new loans to create new income and the economy stops. The second way commercial mortgage backed securities are created is through the federally backed agencies of FNMA, FHLMC and to some extent FHA. Fannie Mae and Freddie Mac actually create “conventional guidelines”, purchase loans, and sell them on the secondary market. This provides liquidity to America’s Commercial Real Estate and Banking Industries. Otherwise, if a bank had $100 hundred million dollars to lend, once they made one $1 million dollar loans they would be out of business until those loans were repaid. If it was a community bank, they could not finance the $1 million dollar apartments in their communities because they may only have $10 million dollars to lend.
Advantages of Agency Loans for Multifamily Properties
Without going into much detail I will list the advantages to a commercial real estate investor to get an apartment loan based on agency guidelines.
- Lower Rates Greater Cash Flow
- Longer Amortizations Greater Cash Flow
- Less Need to Refinance Greater Cash Flow, Less Hassle
- Non Recourse Limit Personal Liability
These are just a few reasons savvy Real Estate Investors choose to invest in multifamily properties and get financed through a lender that provides agency financing versus local community bank financing (that often does not exist).
Actually this is not a new program, but over the last 3 years many similar programs have been discontinued. Today private investors, hedge funds and bridge lenders have begun to offer programs similar to those that were available before the recent financial crisis. One such program available today is the Blanket Mortgage for Commercial or Residential Investor properties. The unique features to this financing option is that it is based on the value and cash flow of the property, not on the credit of the investor.
Commercial Mortgage Loan Size
Most lenders have minimum financing criteria. Generally speaking higher minimum loans are attached to the best rates and terms. This is sad because it locks out a lot of small investors and people buying investments in markets where the average loan size are smaller. It is not uncommon for the note to be at least two million dollars. But there is a market that specializes in small cap financing (smaller loan amounts). These small cap programs have much higher rates to go with the lower loan sizes. These new (retread) blanket commercial programs offer lower rates and more flexible terms. Though still higher than conventional rates, they are much lower than small cap and hard money programs. For the Blanket Mortgage, the minimum funded amount is two hundred and fifty thousand dollars ($250,000) with no maximum loan size.
Residential Investor Loans
Residential Investor financing is the hardest hit in the banking meltdown. It is exciting news that private lenders are back in the market to fund investor properties based primarily on the value and cash flow of the subject property. For residential property owners with multiple properties they will not be hampered by the conventional guidelines that only allow for four residential loans, and the credit criteria is lowered while the emphasis is on the income and value of the collateral.
Whether single family, two to four units, multi-family, mixed use, single use, or industrial properties the blanket program will allow you to put like properties in the same area into one loan. This has many benefits to the owner. The benefits include:
- Larger Financing Sizes: By increase the loan size by adding multiple properties the owner can qualify where they could not and may even get lower rates.
- Mortgage Qualifying: Smaller balances often do not qualify for financing.
- Lower Credit Score Requirements: Conventional and bank programs require higher credit scores and tougher credit criteria.
- Fewer Total Loans: a blanket mortgage will cover two or more properties allowing for lower total cost and fewer note payments to monitor.
- Make Conventional Programs Available: Once the financing is consolidated under one loan this may open opportunities for conventional residential financing.
- Reduced Total Fees: Fewer loans equal fewer fees.
- Reduced Rates: The rates are much lower than hard money and bridge loans.
- Flexible Terms: The program offers short and long term options as well as fixed and adjustable plans with flexible amortizations.
If you are a Real Estate Investor with multiple properties a blanket mortgage may be the program for you to help you qualify for commercial or residential financing while reducing fees and costs as you grow and sustain your business.
THIS LOAN ONLY AVAILABLE IN THE CHICAGO ILLINOIS AREA
Down Payment Assistance
Let us start off by first dispelling the rumor that down payment assistance (DPA) is something for nothing. For commercial projects the down payment may come from a third party but it is in reality funded by the seller. This means it is a creative way to allow the seller to cover the down payment and sometimes even the closing costs. This will allow a real estate investor to purchase an income producing property for little or no money at closing. To make any deal work you first need a motivated owner who is willing to cover the required DPA and the costs associated with it. THE DPA is Seller Funded!!! The seller Funds (Pays The Down Payment) the Down Payment from their equity!!!
Unlike a residential first time home buyer programs that the DPA will come from a government entity, bank (for CRA purposes) or a non for profit organization; in commercial transactions the seller always funds the assistance. No entity has a financial or other interest to give money to people to purchase multimillion dollar income producing investment property other than the seller.
Seller Funded DPA
Once you have an owner – seller willing to utilize creative financing the assistance in the sell of their property you now have the first requirement for a successful creative transaction. Without a willing seller there are no creative financing deals. As a commercial real estate investor attempting to purchase property using little or none of their own money, your first job is to find that willing and motivated seller. But not only must the they be willing, they must be able. This translates to equity in the investment property. Lots of equity. If you expect to fund a project without using your funds the property should have at least 30% equity. Sure you can do deals with as little as 20% equity, but the options for financing are greatly reduced and the buyer will pay at least the closing costs which would include substantial fees for the DPA. Most loan programs that work with DPA are hard money or stated lenders. These programs require a larger down payment.
Given a willing seller and an income producing property with substantial equity, you now have the minimum requirements for a seller funded assistance program.
How the DP Program Works
- Willing Seller
- Property with Substantial equity
- Contract is written for value of the property (seller will receive agreed upon net amount)
- Third Party DPA Company or private investor sends funds to escrow for closing (from buyer).
- Escrow title company sends DP funds plus fee back to 3rd party company at disbursement of escrow (from seller).
- PropertyValue: $1,000,000
- Loan amount: $750,000
- Seller to net: $700,000
- Down Payment: $250,000 from 3rd party DPA Company
- DPA Fee: $30,000
- Return to DPA Company from escrow: $280,000
- Balance for additional closing costs: $20,000
- Net to Seller: $700,000
This is an ideal situation. There are many variations to this deal based on the terms of your specific transaction. You have an opportunity to purchase property from motivated owners willing to utilize creative financing with seller funded assistance for both the closing costs and /or the required down payment. This is how the seller funded program works.