As a real estate investor, you might drive by a vacant lot in a growing city or suburb and think it might be an ideal location for a new multifamily property. If you do your market research, review your financial position, crunch the numbers, and determine that the lot would, indeed, be a great place on which to develop, you will then need to investigate your financing options.
Real estate developers need plenty of capital to purchase and develop a property, and that money can be tied up for years as the project progresses. Because you don’t want to tie up all of your liquid assets, you’ll want to consider financing options throughout the course of your project, and you’ll start with getting a commercial mortgage loan for multifamily real estate.
What Is a Commercial Mortgage Loan for Multifamily Real Estate?
A commercial real estate loan for a multifamily property typically comes in the form of a mortgage loan, which is backed by the property itself and works from a loan to value (LTV) standpoint. The more value that is in the property, the more money the bank or other financial institution will be willing to lend. A commercial loan is usually made to a business rather than to an individual and the term can range from 5 years (or less) to 20 years, but typically does not exceed 10 years. The term will of course affect the interest rate, which is usually higher than on a residential mortgage. Expect to pay bank fees, too.
What Lenders Will Look at Before Approving a Commercial Mortgage Loan
Getting a commercial mortgage loan can be difficult, especially if you’re a first-time investor and don’t yet have a strong portfolio of multifamily assets. But it is not impossible. A lender will look at the property itself, taking into account not only the LTV, but also what you bring to the table with regard to your property ownership experience and your ability to add value to the property and to the community. Your income, net worth, creditworthiness, existing debt burden, and frequency of borrowing will also be examined.
Before applying for a commercial mortgage loan, know that developers typically put down 20-25 percent of the total loan amount in the form of a cash down payment. Lenders will usually require a LTV of around 80 percent of the total purchase price of the land.
Like any mortgage loan, the property will have to be appraised and the loan will go through an underwriting process before approval.
Forming a Partnership Could Prove Advantageous
Investing in multifamily real estate can be challenging. So, as you continue to develop your real estate investment plan, consider ways to increase your spending capital to find greater investment opportunities. For example, consider working with a partner who can bring more money to the table and more resources to your project. A partner can share the overall project risk and labor, too. With a partner, you might be able to purchase larger properties and save on contractor, attorney, and broker fees for your real estate project. A partnership in real estate investing can be a powerful tool utilized to better leverage your time and money.
If the requirements to obtain a commercial mortgage loan seem daunting, you might consider working with a real estate investment management company to help you through the process.
At CWS Capital Partners, we are a fully-integrated multifamily real estate investment management firm that offers everything from due diligence and risk management to transaction support and property management. We specialize in assisting our clients with 1031 exchanges, acquisitions, repositioning, and development. We own and manage luxury multifamily investment communities in major markets around the country and we employ a team of experts who can help you hone your investment strategy.
Please contact us to learn more about investing with CWS Capital Partners, or view our current offerings by completing our self-certification form for accredited or qualified investors.
The information provided here is for your general informational purposes only. It should not be considered a recommendation or personalized advisory advice. CWS has made this third party information available from authors it believes are knowledgeable and reliable resources. However, its accuracy or completeness cannot be guaranteed and sentiment may change due to legal or economic conditions.
All investments involve risk including the possible loss of principal. You should familiarize yourself with all risks associated with any investment product before investing.
Advisory services are provided by CWS Capital Partners LLC, a registered investment advisor.
Securities offered by CWS Capital Partners LLC are through an affiliated entity, CWS Investments. CWS Investments is a registered Broker Dealer, member FINRA, SIPC.