Multifamily Minute Reader Reflections: What Are 2023's Financing Challenges?
We surveyed 40,000 multifamily investors and, unsurprisingly, the largest concern was rising interest rates.
In the Jan. 3 edition of the Multifamily Minute, we surveyed our 40,000 readers. The question? What challenges face those seeking multifamily financing this year.
Survey Results
It's absolutely unsurprising that the majority of respondents — more than 60% — pointed to rising interest rates. After all, the current federal funds rate of 4.25% to 4.5% is in stark contrast to the same time last year, when rates ranged between 0.0% and 0.25%.
See the full table of results below.
Factor | Percent of Respondents |
|---|---|
Higher interest rates | 62% |
Tighter underwriting standards | 24% |
Harder to find a good lender | 5% |
Lengthier approval timelines | 5% |
Other | 4% |
There's a lot to unpack regarding the tightening of underwriting standards. This involves the standards lenders set for debt service coverage ratios, loan-to-value ratios, and more. But we'll get into that in a future survey to drill down on the most relevant aspects.
How Much Will Interest Rates Rise?
So, back to interest rates: There are two things to think about here.
First, the federal funds rate is positively, absolutely going to rise even further. Federal Reserve Chair Jerome Powell has hinted that rates will continue increasing, likely capping north of 5%. And, if inflation isn't sufficiently mitigated, expect rates to grow even more.
The second? Rates are not at historic highs. Yes, it's been a painful adjustment, especially for those with floating-rate financing. Still, it's not even as high as rates were in mid 2006, when rates hit 5.25%. And, of course, we're a long way from the crazy days of the early 1990s, when rates got as high as 8%.
Here's how the higher federal funds rate has pushed other index rates, like SOFR and the WSJ Prime, northward:
So, are things looking great? Not particularly, no, but they could be worse.
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Our Previous Survey
In case you missed it, the week before we asked about our readers' multifamily plans for 2023. Is it a good time to buy, sell, or refinance? Read our analysis of the results.
Related Questions
What are the biggest challenges facing multifamily financing in 2023?
The biggest challenges facing multifamily financing in 2023 are the availability of capital, the cost of capital, and the terms of the loan. According to our analysis of the results, the availability of capital is a major challenge for multifamily investors this year. This is due to the fact that many lenders are still dealing with the fallout from the pandemic and are not as willing to lend as they were before. Additionally, the cost of capital is also a challenge, as lenders are charging higher interest rates and fees than they were before the pandemic. Finally, the terms of the loan are also a challenge, as lenders are offering shorter loan terms and more restrictive terms than before.
What strategies can investors use to secure financing for multifamily properties?
Investors can secure financing for multifamily properties through a variety of methods. These include traditional bank loans, FHA loans, Fannie Mae and Freddie Mac loans, and private money loans. Each of these loan products has its own advantages and disadvantages, so it is important to research each option carefully before making a decision.
Traditional bank loans are typically the most common type of loan used for multifamily properties. These loans are usually offered at a fixed rate and require a down payment of at least 20%. They also typically require a good credit score and a debt-to-income ratio of no more than 45%.
FHA loans are insured by the Federal Housing Administration and are available to borrowers with lower credit scores and down payments as low as 3.5%. These loans are typically offered at a fixed rate and have a maximum loan amount of $1,000,000.
Fannie Mae and Freddie Mac loans are government-sponsored loans that are available to borrowers with good credit scores and down payments as low as 3%. These loans are typically offered at a fixed rate and have a maximum loan amount of $3,000,000.
Private money loans are typically offered by private lenders and are available to borrowers with lower credit scores and down payments as low as 10%. These loans are typically offered at a variable rate and have a maximum loan amount of $2,000,000.
It is important to research each of these loan products carefully before making a decision. Each loan product has its own advantages and disadvantages, so it is important to find the one that best fits your needs.
What are the most important factors to consider when financing a multifamily property?
The most important factors to consider when financing a multifamily property are the property location and the loan amount. Property location can affect the financing options available and the terms of the loan, while the loan amount is typically limited by either the loan-to-value ratio or the debt service coverage ratio.
For more information, please see Multifamily Financing: Your Comprehensive Guide.
What are the advantages and disadvantages of using private lenders for multifamily financing?
The advantages of using private lenders for multifamily financing include:
- Flexible terms - Private lenders often offer more flexible terms than traditional lenders, allowing borrowers to customize their loan to their specific needs.
- Higher leverage - Private lenders often offer higher loan-to-value (LTV) ratios than traditional lenders, allowing borrowers to borrow more money.
- Faster processing - Private lenders often have faster processing times than traditional lenders, allowing borrowers to get their loan approved and funded quickly.
The disadvantages of using private lenders for multifamily financing include:
- Higher interest rates - Private lenders often charge higher interest rates than traditional lenders, making it more expensive to borrow money.
- Shorter terms - Private lenders often offer shorter loan terms than traditional lenders, making it more difficult to pay off the loan in a timely manner.
- Less flexibility - Private lenders often have less flexibility than traditional lenders, making it more difficult to customize the loan to the borrower's specific needs.
What are the most common mistakes made when financing a multifamily property?
The most common mistakes made when financing a multifamily property are not understanding the difference between residential and commercial properties, not having enough cash reserves, not having a good credit score, and not having a good debt-to-income ratio.
It is important to understand the difference between residential and commercial properties because it can affect the type of loan you qualify for. Conventional loans tend to be smaller and require more cash reserves, while government-backed loans may have more flexible terms. Additionally, having a good credit score and a good debt-to-income ratio are important for qualifying for any type of loan.
For more information, check out this article.
What are the best ways to reduce the cost of financing a multifamily property?
The best way to reduce the cost of financing a multifamily property is to shop around for the best loan terms. Different lenders offer different loan products with different terms, so it's important to compare the different options available. Some loan products may offer lower interest rates, longer repayment terms, or lower down payments. Additionally, you may be able to negotiate better terms with the lender if you have a good credit score or a large down payment.
For more information on loan products for multifamily properties, you can check out commercialrealestate.loans and multifamily.loans.