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Hey guys, welcome to the Master Passive Income Multifamily Podcast.Charles Seaman here with Erika McNew.And we're going to be talking today about the top five ways to obtain financing for your multifamily deals.
If you're liking what you're hearing on the podcast, you should text the word freedom to 33777.And that will allow you to get our commercial real estate success guide.
Welcome to the Master Passive Income Multifamily Podcast, where we guide you to invest in commercial real estate with a special focus on raising money from others to buy bigger and better deals.
And now here are your hosts, Charles Seaman and Erica McNew.
Erica, as we talk about financing today, what's the first method that you think would be a good financing option for somebody looking to finance a multifamily deal?
Absolutely.And I think we've talked a little bit about financing on some of our previous episodes, but this is cool to get into a little bit more details around your options.I think the first one would be just your conventional mortgage.
Typically with commercial lending in particular, I'll find it to be 30% down on investment properties.And so those are going to be just your traditional banks.
You can also get conventional for the two to four unit multifamily, and that can be 20% down when you're doing it on the residential side of multifamily. So another reason to scale your way in to mitigate cash if you're looking to go that route.
Pros of that one is going to be obviously that lower interest rates, longer terms.So on the commercial side of the lending, it's going to be 15, 20 year mortgages.Typically on the residential side, you'll typically find that 30 year.
So that makes a difference to that monthly mortgage payment.Some of the cons though, you know, that down payment on the commercial side is going to be that 30%.Typically you do have to have very good credit.You have to be able to qualify personally.
So that would be one of the first financing options.What do you think? Charles?
So I think that's a great option for somebody looking to get into a smaller multifamily property.
You know, it could be something maybe you're looking at as a house hack, maybe something that you're looking at as as a starter investment to kind of build up your portfolio.You know, conventional mortgages can be great resources for that.
I know a lot of a lot of people have done that very successfully.It's a great way to kind of jump in the deep end without going too far in and gives you a chance to go out there and learn and still be able to build yourself up in the process.
Yeah, absolutely. Well, in that same vein, another one we'll talk about is FHA multifamily loans.Now, the FHA loans, keep in mind, a lot of times they're really designed for people who are going to be living in a unit at the property.
So it's not something that's going to be for somebody who's buying solely an investment right out of the gate.But there are different loan programs that can be valuable in the purchase of multifamily properties that are five units and larger.
Some of the more common ones here are the FHA 223F program and the FHA 221V4 program. So what are the pros and cons of these programs?Well, the pros are that you get a lower down payment.In some cases, it could be as low as three and a half percent.
You get longer amortization periods and you get fixed rate options.So those are generally all good things.
One thing that you'll find is you get into larger loans for investment properties is that sometimes you don't always get those same characteristics.So that can be very attractive, especially if it's something you're going to be living in.
And what are some of the cons?Well, they require more paperwork, so there's more due diligence, there can be a lengthy approval process. And similar to the single family, you're going to see more than insurance premiums required.
So the rules are a little bit different when you're when you're playing the game with something that's going to involve you living in it versus something that's going to be strictly an investment.What do you think, Erica?
I actually was looking at purchasing a four unit about six months ago, almost negotiated it, but it didn't work out.
And I was looking at the FHA multifamily financing at that time, and I would have been able to do it for as little as three percent down.Obviously would have to live in a unit.So but currently, you know, like I've lived in apartments before.
And so it's not that big of a deal to live in a four unit that I own.Right.
And so one of the caveats of it, though, is that you do you did need to have for that specific loan product, six months of cash reserves for every unit and be able to show that.
And so that was one of the caveats to the loan that I thought was interesting to find out, you know, that way you're mitigating your risk going into it.And it was really cool because technically
the cashflow of the units that are additional beyond what you're living in, whether it be a duplex or a four unit, technically can be reapplied to the loan so that you can get a higher loan amount.
And so I really, really loved that loan product in particular.I think that is phenomenal.And what a lot of people don't realize is if you are a veteran, first of all, thank you for your service.And you are able to get the VA loan product.
That is a phenomenal product.And veterans can actually also purchase one to four units with their VA loan, which a lot of people don't know.
So it's a phenomenal option for people that are looking to do owner-occupant, but also take on a really great investment at the same time.
Awesome.So what else do you got, Erica?What are the financing methods can people use when they buy multifamily property?
Well, commercial real estate loans.One of the ones I'm most familiar with would be an SBA loan, small business administration loan.SBA, you can get the SBA 7A or a 504 loan.And we did a 7A because we were a company that were less than two years old.
It is for the owner occupant.So we did it for an industrial building.And it is very, very difficult to get through.You have to be qualified and well put together and really know what you're doing and well researched.
However, we closed on that first SBA loan.It took six months.We closed on our industrial building.And then after that, SBA is truly like a partner with you.So we've now gotten a business loan through them for the business.
We are currently looking at more acquisitions with SBA loans with them.So they're a really great partner.The commercial real estate lending is another beast.
So you definitely, that's why I really encourage before just jumping right into trying to buy, you know, a hundred unit building or an industrial building, that potentially you start off with that one to four unit on the residential side, or even a five to 12 unit on the commercial side.
But what do you think, Charles, about that commercial real estate lending piece?
You know, most times this tends to be the financing vehicle of choice for my deals.Most of the deals that I do usually have these types of loans, and commercial real estate loans can encompass a lot of different things.
In the multifamily space, it can be you know, the GSE loans like Fannie Mae and Freddie Mac, it can be hub loans, it can be bridge loans from debt funds, they can be CMBS loans, they can be life insurance companies.
So most of my deals usually use this type of financing.One thing that I've learned from my experience is that while conventional financing in the commercial real estate space can be boring, there's something to be said for boring.
You get consistency, you know what you're getting.A lot of times these loans tend to include fixed rate products, except for the bridge loans, those can be floating rate.So getting a long term loan, plenty of time,
fixed rate that you know your payment is going to be every single month has a lot of value to it.
To Erica's point, you know, while I would say, you know, you could go bigger if you want to at the beginning, I wouldn't recommend it if you don't have the capital behind it, because things do go wrong in these deals.
And you need to make sure you have money to backstop those things.You know, you got to be in trouble.
Absolutely, because we were able to acquire that SBA 7A loan, which was phenomenal, but we had to do so on an arm.And so that mortgage went up 64% within one year and three months.
And so we're very fortunate to have built the cash reserves that we did and also to have been wise enough to mitigate margins within the company and really cut down on expenses.
Otherwise, that would have been pretty painful for a manufacturing company. So you definitely have to be on your game with commercial real estate lending, but I think it is what most of us choose to use on our.
And one thing I would also say, so unlike an FHA loan or a single family mortgage where you may be able to put less down, most commercial real estate loans aren't going to allow that.
They want to see that you have usually at least 20% of the purchase price in there as equity.So they're going to require that in order to really get these loans.
And some of them may go as high as 50%, depending on how risk averse the lender is, on how well the property cash flows, ultimately how well you're able to meet the debt service.So the priority is always protecting themselves.
So in accordance with that, by them lowering the amount of debt they're willing to give you, that reflects their belief in the property's cash flow.So sometimes it's smart to keep those warnings.
and make sure that you're paying a price that reflects that.
What are some of the cons, Erica, with commercial real estate loans?
You will typically find you're going to have the larger down payments, right?And so you're going to have also typically higher interest rates on those loans.Like I said, it requires a very strong profile of the team.
the business and how all of that is operating.So if you are not qualified enough to get one of those loans, you are going to have to partner with somebody that is willing to be a guarantor.
And also from my personal experience, depending on your equity position going in, they may even want to put a note on another property.Like with an SBA loan, they could put a note on your other property should you own it outright.
And so they chose to do that, which locks up the equity in that property in order to acquire the commercial real estate. And so, worst case scenario, should anything happen, you're not able to just get that note off the property.
So that was a con that we found that we were able to work around, but definitely still really great options for sure.
Definitely.So to add a little bit to that, guys, that's cross-collateralizing properties.
Only do that when you're very certain it's going to work, because if something doesn't work and you cross-collateralize, not only are you losing the property that you're acquiring, you could potentially also lose the well-performing property that they've also leaned.
So just be very careful with that.
Okay.So way number four, private money and hard money.So for anybody who's familiar with the So private loans, as the name implies, are loans for private individuals or companies.Usually they're designed to be short term loans.
Hard money is also the same thing.There's usually a little more of a structure with hard money than private money.With private money, it could be somebody who has perhaps funds in a retirement account.
It could be somebody who has cash value in a life insurance policy.It could be an extra neighbor who just has a lot of money underneath their mattress. know, it could be a lot of different things.
So it's negotiating with, you know, a person or company to get the best rates in terms of you can a lot of times, you know, those rates may wind up being higher than what you would get the conventional financing.
But the benefit to them is that you're able to get those those funds usually quicker and easier.There's less of an approval process.Most times they're not screening the
the creditworthiness of the borrower, even if they should be, they're not a lot of times.So, if you need money for a fast closing, that can be a great resource.So, they can be great for the stress property too, right, Erica?
Because sometimes you need to close quick and you may not have that money so you can go ahead and get a private loan and that may allow you to close it.You were great.
I absolutely agree.I work with a lot of distressed sellers of properties and my private money lender partner, he's phenomenal.
I know that if, for instance, I had a property where I almost had to close within 24 hours to save her from the foreclosure auction and we only had 24 hours. And turns out there was a cloud on title that popped up as they were doing the title search.
However, I contacted my private money lending partner and I said, Hey, I need $120,000 and I need a wire tomorrow.And he was on it with, here's the terms, here's what we're going to need from you.And was phenomenal.
So having a really good network of partners for private money lending, I think is super critical because you get to a point where you don't worry about finding opportunities and not having the money.
And that's the confidence that private money lending partners can give you where, and I will say it's very similar to having relationships with small community bank managers and such.
So having your network for this category in particular, I think is critical.
So it totally is.You know, I can give an instance even like where one time when I purchased the property using hard money and private money, that wasn't really the plan.So it's rare that I ever use private money or hard money as a first option.
It's usually more of a last resort.And that's kind of what happened here.And you know, we were on the contract to buy a property in South Carolina, we were planning to get it finance with a Fannie Mae.
But unfortunately, we were about two months in and you know, fairly close to when we needed to close.And it was at that point that there was some title issues that became apparent that whatever reason hadn't been caught earlier in the process.
And those issues with that there were some some some restrictive housing covenants on the property, and basically pertaining to affordability and you know, who could rent the property and what income they could have and what rent they could pay.
So, that became a big flag for Fannie Mae, which is exactly not what you want to hear before you need to close.So, you know, what we did is we wound up negotiating an extension with the seller.We were unable to get Fannie Mae to bite.
So, finally, at the end of it, we wound up closing the deal with a combination of, you know, a hard money loan with, you know, a certificate loan we got from an investor, and then also a private money loan from three of our team members that put in, you know, another
good chunk of change.And that allowed us to close the deal.So sometimes you need a little creativity.It's good to have more than one option.So that way you can you can get deals across the finish line.
And I will say, let's also include in this category, seller financing, because creator financing and seller financing is a really big one right now, especially too.And there's a lot of creative ways to get deals done.
Even my private money lender partner, They have an investment group that if a seller, I have a specific lending partner that will allow a second lien to go on the property, which is very hard to find.
However, them along with my private money lending partner has the investor group that will buy the seller financing note from the seller.
after the transaction closes so that the seller can get out completely and basically finance the down payment for the buyer.
So very creative strategies that can be done utilizing seller financing and private money lending, but you have to have a really good network and a decent amount of knowledge on how to operate that.
Obviously a really good attorney in that network as well. Totally.
Seller financing is definitely a very popular method for people starting out.For people who are looking to get into properties or creativity, seller financing can be a great option.
A lot of times you're not going to see that as a viable option with a property that's distressed.
But if you have a seller that has some equity, and it's more important for them to get the price that they want, then maybe you can make them compromise on terms to get that.
And capital gains tax, gosh, that can be a whole lot of fun depending on how long they've held the property.So helping them mitigate their capital gains tax through doing a seller financing scenario as the seller can be a huge win for them too.
Oh, it's totally good.I agree.So as we talk about financing, another one we have, and this one's really more on the equity side is real estate syndication.
So that's that's a group of partners, they pull together their resources, their money and their expertise to purchase property.
And a lot of times you're going to have usually a partner or local partners who wind up being what they call sponsors or general partners, they're going to be the ones finding the investor running the the opportunity.
And then you'll have money partners, which are going to go in there and provide equity.So this is a strategy that's become, you know, increasingly popular over the last decade and a half since Dodd-Frank has passed.
And it's something that you see a lot of groups using to be able to acquire larger properties that they wouldn't have access to in the past.What do you think of some of the pros and cons of predication, Erica?
Yeah.And this is your category, Charles.I love this.So I think that First, it allows people to be the ones that can locate the deal.
It allows them to be able to put together and pull together a deal for a property that they may not otherwise be able to get in on based on purchase price.And so that's obviously a really special option.
I love the idea, too, of finding a really great opportunity.And it's friends and family that you're pulling the money together from.
And so you're allowing them to go on a wealth building journey with you on a property that none of you could maybe buy on your own, but you can together in this pool as a syndication. So I love this.The pros of it are awesome.
Some of the cons, what do you think, Charles?Tell us about some of the cons of syndication.I know you see this on a daily basis.
Well, you know, for me personally, the biggest con is control.You know, I don't like giving up control with anything I do.So because of that, I wouldn't be a very good passive investor.
But for somebody who wants something totally hands off in the real estate space, you know, equity syndication is probably about as passive as you're going to get.
If you want something equally passive, you probably got to be on the debt side, like a note or a private lender or something to that effect. So it's very hands off if you're an investor, and people like that approach.
That can be a pro if you want, it can be a con if you don't.The other con I would say is that sometimes you have a lot of people making decisions.
And the risk there is that sometimes, you know, not everybody agrees on those decisions and what the right decision is for a particular circumstance.
So you need some compromise, you need to have partners that are willing to set aside their egos and to be able to, you know, do it to the better good of the deal and the investors.
That's absolutely true.And I think just if you are looking to be a passive investor in a syndication fund, qualifying the asset and qualifying the team are really, really, really important.
And if you are looking to be a general partner, then I would highly, highly encourage that you partner with somebody who has done it before and has a track record of success.
It definitely is a serious game of when you're taking money from other people and utilizing it for investment.
you definitely want to make sure that you have a fiduciary duty to those investors to not only make sure they get their money back, but that they get the returns that you're promising them.So really great option.
I want to be taken very serious for sure.
So totally is.Well, that's our top five ways to finance your multifamily properties.Once again, if you want our commercial real estate success guide, text the word freedom to three, three, seven, seven, seven.And, and we'll wrap up this one.
See you guys next time.Thanks guys.
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