Multifamily loans are financing options that are available to real estate investors who wish to expand their portfolio beyond single-family properties. Multifamily loans are provided by a variety of institutions, including banks, credit unions, other commercial lenders, and private investors.

Multifamily loans are a great way for investors to finance the purchase, refinancing, development, or rehabilitation of a multifamily property. In this guide, we’ll explain the basics of multifamily loans, the features and advantages, and the process of applying for a loan. 

What Is Multifamily Finance? 

A multifamily loan is a financing tool used for the acquisition, refinance, construction, or rehabilitation of a multifamily property. A multifamily building is literally any property where there are two or more residential units, but many multifamily loans are restricted to those assets with five or more units.

A multifamily loan is typically secured by a lien on the property, and the loan may also include additional security such as personal guarantees. The term of the loan can be anywhere from six months to 40 or more years. They aren't always straightforward, and loans can be very different from lender to lender — and from borrower to borrower.

What Kinds of Multifamily Loans Are Available?

There are many types of multifamily loans available, and these loans can be categorized by type or by the specific purpose for the loan. Depending on your situation, some of the financing types listed below may be a good fit, but many will not be. 

It’s important to understand them regardless, however, because as your real estate investment strategy expands or is tested, the type of loan you may need could change.

Multifamily Financing by Term Length

Permanent Loans

Permanent loans are often used to purchase or refinance a multifamily property. They are typically amortized over a period of 20 to 30 years and can come with either floating or fixed interest rates. Agency loans — think Fannie Mae and Freddie Mac loans — are generally permanent financing options, as are CMBS loans, HUD financing, and longer-term bank, credit union, or life company loans.

Short-Term Financing

There are a few different short-term financing options available for multifamily properties and developments. Short-term loans typically are more expensive, with higher interest rates and fees, but they also play a unique and important role in the acquisition or development of a property. Most of these loans have terms ranging between six months and two years.

Multifamily Financing by Purpose

Regardless of a loan’s term length, we can also classify multifamily loans by what they’re used for. This is one of the most useful ways to categorize financing types, as you probably already know what you need the financing for.

Acquisition Loans

Acquisition loans are used for the purchase of a multifamily property. These can be longer-term, permanent financing packages, but short-term bridge loans are also very common for purchasing a property. 

If you are acquiring a property to flip it, for example, a bridge loan may be your best option. Same goes if you are purchasing a newly delivered multifamily community that isn’t yet fully leased. Permanent financing can be difficult to obtain when the asset is in a relatively unstable stage of its life.

Refinancing Loans

Refinancing loans are used to refinance existing debt on a multifamily property. There are several reasons why an investor would choose to refinance. 

First, they may do so to take advantage of better rates. If you took variable-rate financing and interest rates have started to rise, refinancing may make a great deal of sense so you can lock in a fixed rate, hedging against future increases. Similarly, when rates are falling, you may be best served by refinancing to secure a lower interest rate.

Second, a borrower’s property may have significantly changed since the first loan closed. Imagine acquiring a property with an occupancy rate of 50%. Most lenders probably wouldn’t have given you the best terms. After leasing up the rest of the community — and keeping a higher occupancy for a period of time — you will likely be able to get significantly better financing terms, given the performance and stability of the asset.

Third, your existing loan may just be about to mature. If you don’t have a fully amortizing loan, that means you will likely owe a balloon payment — essentially, the remaining principal of the loan — at the end of the term. Because most investors don’t have that kind of cash on hand, it often makes more sense to refinance instead.

Construction Loans

As you might expect, construction loans are used to finance the construction of a multifamily property. They typically have a term of six months to two years, and they are typically interest-only loans. 

That said, not all construction loans have short terms. Consider the Department of Housing and Urban Development’s HUD 221(d)(4) multifamily construction financing. This loan offers terms of up to 43 years at a fixed interest rate, making it an incredibly popular option for apartment developers.

Bridge Loans

Bridge loans are short-term loans used to “bridge the gap” between the purchase of a property and the closing of a permanent loan. They typically have a term of six to 12 months, and they’re often interest-only.

These loans are particularly useful when you need to quickly close a loan for an acquisition. Most bridge financing packages offer short funding timelines, and they can be ideal when you’re waiting for more advantageous financing — say, a HUD multifamily loan — to deliver. Bridge loans are more expensive than most other financing types, but they are incredibly useful tools to have in your multifamily finance toolkit.

CMBS Loans

Also known as conduit loans, a CMBS loan is a type of financing that is pooled with similar loans into securities, then acquired by investors on the secondary market. This type of loan can be particularly advantageous for borrowers with less-than-ideal credit with a strong property: Lenders tend not to scrutinize a borrower as much as the income-producing property.

Rehabilitation Loans

If you own a property that needs some upgrades, a rehabilitation loan may be exactly what you’re after. This type of loan provides an investor with capital to renovate an existing apartment building or community. Many of these loans have a term similar to construction financing, but they are often less costly to service. Some are longer term, however: Take Fannie Mae’s Moderate Rehabilitation Loan, for example, which can have terms between five and 30 years.

Mezzanine Loans

Mezzanine loans are used to finance a multifamily property at higher leverage than a traditional loan. They aren’t used on their own, rather they “top up” the amount of leverage you can get on a property.

For example, let’s say you have a $2 million loan on an apartment building valued at $3 million, or a loan-to-value ratio of about 67%. If you’re seeking higher leverage and turn to a mezzanine lender, perhaps you could get an additional loan of $400,000. That would bring your LTV ratio to 80%, which could provide you with a better return.

Characteristics of Multifamily Loans 

With so many different kinds of multifamily financing out there, it’s also important to familiarize yourself with the loan characteristics you will see, so you can compare similar financing options to make your best choice.

Multifamily loans, regardless of term length or purpose, will have the following characteristics.

Loan Amount

Of course, every loan has an amount. However, different types of financing will be able to provide you with capital at different loan-to-value or loan-to-cost ratios. If you are seeking to maximize your leverage, it makes sense to aim as high as you can.

Most multifamily loans offer financing at an LTV of up to 75%, but some financing types can go significantly higher.

Loan-to-Value Calculator

Curious what your loan amount translates into, in terms of LTV? Enter your figures into the calculator below.

Loan Term

Multifamily loan terms vary widely. Construction loans, as previously mentioned, usually go up to two years, while longer-term permanent loans may extend for 30 years or more. Many agency loans have terms of around five to 10 years, though amortization periods are generally far longer.

Amortization

A loan’s amortization period is the schedule of payments to fully pay off a loan. This isn’t the same as the loan’s term, unless the loan is fully amortizing. Think of it in terms of a home loan: If you have a fully amortizing, 30-year mortgage on your house, once 30 years have passed, you’ve paid off the loan.

Now, imagine that you keep those same payments, but the loan’s term is only 10 years. This would be a partially amortizing loan with an amortization of 30 years. Of course, in the case of partial amortization, the loan won’t be paid off at the end of the term. Instead, you would have to pay a balloon payment to cover the remaining principal and interest remaining.

Multifamily Mortgage Calculator

Curious about what your balloon payment might be with a partially amortizing loan? Use our multifamily loan calculator below.

Interest Rates

You’re likely familiar with what interest rates are, but it’s important to consider any differences in rates you’re quoted. After all, even a slightly different fixed or floating rate could have a sizeable impact both in monthly debt servicing costs and for any end-of-term balloon payment.

If you are comparing a fixed-rate to a variable-rate loan, pay close attention to economic conditions. A loan with a variable interest rate may make more sense as interest rates are declining, but if rates are on the rise, tread carefully.

Current Interest Rates

Below, you'll see the current rates of several important indexes, updated daily. Note that these are not the rates you would receive on a loan, but many loans have interest rates tied to one of these rates.

Prepayment Penalties

Prepayment penalties are pretty common for multifamily loans. These stipulations ensure that lenders are able to receive their earnings from interest payments that have been projected during a loan’s term. Generally, if a borrower pays a loan off ahead of schedule, they will need to pay an additional fee or provide an additional source of revenue to the lender.

Step-Down Prepayment Penalty

The most common prepayment penalty is a step-down penalty. Also called a graduated or declining prepayment penalty, this type imposes a penalty fee equal to a percent of the outstanding balance, with the percentage declining over time. An example is a 5-4-3-2-1 step-down, which essentially means that, should a borrower pay the loan off in the first year, they would need to pay an additional 5% of the outstanding balance to the lender, followed by 4% if paid off in the second year, and so on. After the fifth year in this example, where the fee is 1%, there is no penalty.

Yield Maintenance

Another common penalty is yield maintenance, which is often found in Fannie Mae or Freddie Mac multifamily loans. It is generally calculated by taking the remaining loan payments and multiplying them by the difference between the loan’s interest rate and the Treasury rate with a similar term.

Yield Maintenance Calculator

It may be easier to illustrate yield maintenance with a calculation than with walls of text. Go ahead and put in some values below to determine the cost of yield maintenance.

Defeasance

Defeasance is, hands down, the most difficult prepayment penalty to work with. Common in CMBS loans, defeasance requires the substitution of income-producing collateral if the borrower chooses to pay a loan off early. This often means that an investor will purchase an equivalent amount of U.S. Treasury securities to substitute for the collateral property. It’s expensive and very complicated, often requiring a team of legal experts to handle properly.

Loan Fees

Loan fees, including anything from closing costs to origination fees and appraisal fees, are a part of every financing option out there. These fees differ by the instrument used, but they can add up to quite a bit if you’re unprepared. Also be sure to note any application fees.

Some fees are a longer-term part of a financing package, too. Consider HUD multifamily loans and their mortgage insurance premium, or MIP. While a borrower must typically pay an upfront MIP equal to a percent of the loan amount, these are often paid annually at a smaller amount, as well.

Advantages and Disadvantages of Multifamily Loans

There are pros and cons of taking out a multifamily loan compared to loans on other types of commercial real estate. Let’s take a look at a few.

Pros of Multifamily Financing

• Better Interest Rates: Due to lower risk in the multifamily property sector, loans typically come with lower interest rates than similarly valued properties in other commercial real estate sectors.

• Longer Terms: Although many multifamily loans are limited to between five and 10 years, some financing types, like HUD loans, offer fully amortizing, long-term options.

• Flexible Terms: Due to the wide range of options available, borrowers can often find the terms they’re looking for by shopping around.

• Higher Leverage: Multifamily financing typically allows for higher LTV ratios than loans for other commercial real estate assets, like office and industrial buildings.

Cons of Multifamily Financing

• Prepayment Penalties: If your multifamily loan has a prepayment penalty, it can be significant.

• Required Reserves: Some types of apartment loans require the borrower to keep a certain amount of cash reserved for necessary property repairs. While this is something any apartment investor should be doing, required reserves can limit an investor’s flexibility. Note that all HUD loans require reserves.

Qualifying for a Multifamily Loan

Borrowers must meet specific criteria to take a multifamily loan in most cases. While there are some loan types that scrutinize a borrower less closely — CMBS and hard money loans, for example — most lenders will expect you to demonstrate the following items.

Credit History

Most lenders have a preferred credit rating for their borrowers. Showing a good credit score indicates you are a reliable borrower who will make loan payments on time for the duration of the loan term.

Income

Lenders will look at the borrower’s property income as well as any other sources of income, in many cases. If your income does not exceed the debt servicing costs by a significant margin, expect to pay higher fees and rates to cover the additional risk the lender is taking on.

Collateral

For most first-time multifamily borrowers, a lender will want to see significant collateral to secure the loan. This may include putting up your personal property or other assets as collateral in the event of a default.

Note that more experienced borrowers, and borrowers utilizing certain types of financing programs, like Fannie Mae, Freddie Mac, or CMBS loans, may be able to get a non-recourse loan. Non-recourse loans use only the financed property as collateral. This means if the loan goes into default, the lender may only repossess the multifamily property to cover its losses. Non-recourse financing does tend to come with higher costs, however, due to the increased risk for the lender.

Conclusion

After reading our guide, you should have a solid grasp about what multifamily finance is, and how you can leverage it to make your apartment investment a successful one.

The advantages of multifamily loans make them an attractive option for investors who are looking to purchase, refinance, or rehabilitate a multifamily property. Multifamily loans are typically available with lower interest rates than other types of loans, and they are typically available with longer terms. Furthermore, multifamily loans are typically secured by the value of the property, which gives borrowers the peace of mind that their investment is secure.

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