In this article
- Best Apartment Loans for Smaller Multifamily / Commercial Properties
- Fannie Mae
- Freddie Mac
- Very Small Apartment Loans
- Bank Balance Sheet / Portfolio Loans / Private Money
- HUD/FHA 223(f) Loans
- CMBS Loans
- USDA Multifamily Loans
- Seller Financing / Assumable Loans
- Hard Money
- Business Loans
Best Apartment Loans for Multifamily Properties
Apartment loans are surprisingly plentiful in today’s market, even during the COVID-19 pandemic. That’s because everyone needs a place to live — more so now than ever as travel and gathering are limited.
Lenders are eager to loan on this relatively safe investment at rock-bottom rates, benefitting large and small apartment (a.k.a. multifamily) buyers.
But what are the best apartment loans, and, can you get one even if you’re just starting out? Here’s a list of the best programs available now. These are not listed in any particular order because any loan can be your ‘best’ one depending on your situation.
Types of Commercial Real Estate Loans: Ground Rules
For this article, we’ll be focusing on commercial multifamily loan programs, meaning:
- The building has 5+ units (below that number is considered residential)
- You need a loan amount of less than about $7-10 million
- It’s a multifamily property (apartment building), not an office building, storage facility, or other commercial property
- You have some kind of down payment and (in most cases) good credit and financial standing (100% commercial loans, bad credit commercial loans are hard to come by in this market)
Assuming you fit these criteria, let’s dive in.
Fannie Mae Small Loan Multifamily Program
The Fannie Mae Small Loan program is available to smaller multifamily investors looking for loan amounts between $750,000 and $6 million.
Fannie Mae also offers much bigger loans in the tens of millions of dollars range. But it split out this segment to offer smaller investors lower fees and a streamlined approval process.
You can borrow up to 80% of the purchase price, and this is a non-recourse loan, meaning only the property is at stake upon default, not your personal assets.
The challenge with Fannie Mae of late is that you likely can’t buy an apartment building on your own if you have no previous experience. You need two years’ experience owning similar-sized multifamily to use the program.
But first-time investors can partner up with someone with more experience or obtain a different loan type to start. With either of those two options, you build experience and can use Fannie for your next deal.
Here are other highlights of the program:
- Available nationwide
- 5-30 year fixed rates and 7-10 year adjustable rate loans available
- Personal net worth must match the loan amount
- Down payments as small as 20%
- Minimum DSCR of 1.25x
- $10,000 application deposit (covers appraisal and other 3rd party reports) — much lower than large-balance multifamily loans
- Loans are assumable
- You can add a second, supplemental loan after 12 months rather than refinancing
- Interest-only payments available
- Is easier than Freddie Mac Small Balance outside of major metros
- These loans come with prepayment penalties (as do most commercial loans)
The main drawback to Fannie Mae, besides experience requirements, is the 18-month reserve requirement. That means you must have 18 months of principal and interest payments in liquid accounts at closing, after paying the down payment and closing costs. This could be over $100,000 on a $1.5 million apartment building purchase. For these reasons, some people opt for Freddie Mac Small Balance (discussed in the next section) which requires 12 months.
For a deep dive into the Fannie Mae Small Loan (and we mean deep), click here.
Freddie Mac Small Balance Loan (SBL) Multifamily Program
The Freddie Mac Small Balance Loan program is the more popular of the “agency” loans. (Fannie and Freddie are known as the “agencies” or “GSEs”.)
Freddie has frankly done a better job at targeting the smaller multifamily investor/buyer with its program. While it matches Fannie Mae’s down payment minimum of 20%, it only requires 12 months of principal and interest reserves instead of Fannie’s 18, potentially saving upwards of $50,000 in upfront cash outlay.
Additionally, Freddie Mac goes up to $7.5 million in top markets, versus Fannie Mae’s $6 million. If you’re on the higher end of the “small balance” loan scale, you can save significantly by avoiding the full-fledged Fannie and Freddie programs and associated higher fees and processing times.
Here are highlights of Freddie SBL.
- Low rates
- Fixed and adjustable rates with 5, 7, & 10 year terms, amortizing at 30 years (meaning you make a payment as if it were a 30-year loan, reducing payments)
- Non-recourse (the lender can’t come after personal assets in the case of default)
- Minimum DSCR of 1.20x
- Net worth equal to the loan amount
- $7,000 fee for appraisal and other 3rd party reports, plus an additional 0.10% processing fee ($1,000 per million borrowed).
- Loans are assumable
- No secondary financing allowed
- Interest-only payments available
- These loans come with prepayment penalties (as do most commercial loans)
One drawback of Freddie SBL is that you will likely need previous experience owning a multifamily property about the same size. There may be some exceptions for buyers purchasing a smaller complex (5-15 units) in their local area and hiring professional management. But you may consider bringing on a partner with adequate experience, or starting with a loan from another source. For more about Freddie SBL, see our ultra in-depth guide here.
To receive offers for other loan types, click here.*
Very Small Multifamily Loans (Under $1 Million)
You might be thinking, “$1 million minimum? I just want to buy a $300,000 5-unit building down the street.”
Great. There are lenders for that, too. Many companies won’t touch smaller loans because they require almost as much work as big loans but yield smaller commissions.
But some companies make their own rules and specialize in “very small” apartment complexes. Remember that “very small” is relative and, in the multifamily world, anything under $1 million is often included in this classification.
Some lenders even go down to $100,000.
For these loans, it’s hard to pinpoint exact qualification metrics since lenders create their own rules. However, some common guidelines are as follows.
- 20-25% down
- Good to excellent credit, although some lenders can consider bad credit
- These will likely be full recourse, meaning your personal assets are at stake in the case of default
- Up to 10 year loan terms with interest-only and 30-year amortization available
- Higher rates than offered by Fannie Mae and Freddie Mac
- Can be used as a “bridge” loan — meaning temporary financing while the property is made suitable for financing with better terms
- Can be used for “fix and flip” deals
- Can close quicker than other loan types
Need to find a small apartment loan lender? Click here.*
Bank Balance Sheet / Portfolio Loans / Private Money
“Balance Sheet” loans or Portfolio loans are ones that a bank keeps on its books rather than selling it off to Fannie Mae, Freddie Mac, or another agency.
Because the bank services the loan in-house, it can make its own rules. So it can be flexible on:
- Multifamily ownership experience (first-time buyers are considered)
- Secondary or seller financing
- Buyer’s credit score/history
- Down payment
- Mixed-use (retail on bottom, etc.)
- Interest-only period
- Loan term lengths
- And more
In the commercial world, lending is much more fragmented than for residential. For residential (1-4 unit properties) lenders typically offer the same general programs nationwide, with only small variance from lender to lender. But many commercial lenders create their own lending rules.
This is a blessing and a curse. No matter what your situation, there is likely a lender out there for you. But finding one that fits your transaction can be a bit like finding the right kind of nail at Home Depot. You know it’s there, but where?
If you’re having trouble locating a lender, click here to get access to over 750 lenders nationwide.*
HUD / FHA Apartment Loans
The HUD 223(f) multifamily loan is likely the best product on the market to buy an apartment building. But it sure has its drawbacks, too.
First, the good stuff:
- As little as 16.7% down
- Low rates
- Fixed loan terms up to 35 years
- DSCR as low as 1.176x (much lower than the 1.20x or 1.25x required by Fannie/Freddie)
- Some commercial space okay
- Some repairs okay
As a government-sponsored program, it offers the right kind of multifamily buyer the opportunity to acquire a property at very generous terms. But it’s not for everyone.
Cons of the HUD 223(f)
- Minimum loan amount of $1 million, but some lenders required a 2.5MM minimum
- 6-7 month time frame from application to closing
- 90% occupancy for the last 90 days
- 660+ credit score, no tax liens or previous government debt default (FHA loans, student loans, etc.)
- Multifamily ownership experience required
- HUD-approved property manager required
- Replacement reserves required — you place additional funds into an account at closing that can be used for future repairs ($250 per unit, per year)
HUD 223(f) loans certainly aren’t for everyone, but offer amazing benefits to those who qualify. Click here to be matched with lenders offering the HUD 223(f) program.*
CMBS loans, or “conduit loans,” are kind of a middle ground between Fannie Mae/Freddie Mac and Bank Portfolio Loans.
CMBS stands for “commercial mortgage backed securities.” This just means that these loans, once closed, are packaged up with other similar loans and sold to investors. Investors buy into these loans because they are relatively safe yet yield relatively high returns.
That’s an important feature if you are considering selling or refinancing within the first few years. Because investors expect long-term returns, the cost to get out of the loan can be quite high. Without going into the math, you could easily be on the hook for $100,000 when exiting, even at the lower end of CMBS loan amounts.
Still, they offer more flexibility than Fannie Mae and Freddie Mac, and are non-recourse, meaning personal assets are not on the line if you default on the loan.
Following are highlights of CMBS loans.
- Minimum $2 million loan amount
- Loan terms up to 10 years with amortization up to 30 years (meaning you make payments as if it were a 30-year loan, reducing your monthly cost)
- 25% down
- 1.25x DSCR
- Net worth of 25% of the loan amount (compared to 100% for Fannie/Freddie)
- Liquid reserves after closing of 5% of the loan amount
- Faster closing than Fannie/Freddie agency loans, more lenient on credit
- No commercial space/mixed-use restrictions
- May require a minimum debt yield (a comparison between net operating income and the loan amount)
- May be able to add a secondary loan/subordinate financing on top, reducing upfront cash needed
As you may have guessed, CMBS loans are designed for more experienced investors, with higher minimum loan amounts and stiffer penalties for exiting. Still, if you’re in the market to buy a bigger multifamily property, have partners, and good capital for upfront and reserve requirements, this could be the ideal loan for you.
USDA Multifamily Loans
While this is a niche program, it could be suitable to some apartment building buyers.
First, you might wonder why USDA is in the business of supporting apartment lending. Well, it’s because one of USDA’s mandates is to provide affordable housing in rural areas, especially to low-to-moderate-income residents, the elderly, and other sensitive groups.
This loan provides up to 90% loan-to-value (10% down) to for-profit buyers, and up to 97% for non-profits. This is a much higher loan-to-value than most programs offer. Additionally, loan terms are from 25-40 years, bringing down your monthly payments. Plus, property improvements and even new construction are allowed — and even encouraged — with this program.
One of the major requirements, though, is that tenants must make less than 115% of the area median income (AMI). Additionally, rents must be no more than 30% of that 115%. So the upside for rent increases (the reason many get into apartment investing) is limited.
Yet another rule is that the loans are only available in rural areas, defined as areas and towns of less than 35,000 people. You can check eligible addresses on USDA’s website.
Another downside: USDA loans are full recourse, which sets it apart from other government-sponsored loans. The lender and/or USDA can come after your personal assets if you default on the loan.
Despite the drawbacks, USDA multifamily could be the ideal program for your project. Like Fannie Mae, Freddie Mac, and FHA, the government does not directly do the lending. Private companies lend, then receive backing from USDA.
Seller Financing / Seller Carryback / Assumable Loans
Seller financing is much more common in commercial real estate than in residential. That being said, it may be harder to get than many articles and podcasts make it.
Seller financing is when the seller finances all or part of the purchase by — basically — acting like a bank and making a loan to you, the buyer.
Most of the time, this takes the form of a 2nd mortgage (subordinate financing). For instance, you purchase a $1 million apartment building. You get financing for 70% ($700k) through traditional means. Then you finance another 10% ($100,000) from the seller.
In other cases, the seller could issue you a loan, for whatever loan-to-value he or she is comfortable with. A very generous seller could even finance 90% or 100% of the purchase price, although it would be a risky move. The point is, there are no “rules” for seller financing — it’s all about what the seller agrees to.
The key to seller financing is learning about the seller’s situation. Is their main goal to get rid of the property? Do they have an insane prepayment penalty? Are they trying to avoid capital gains tax? Do they need to unload the property within 30 days, but don’t have an all-cash offer?
In these cases, a seller may say yes to a carryback. Less sophisticated sellers may not even know it’s an option until you ask. Remember, don’t even mention how it will benefit you. Focus solely on what they will get out of this arrangement.
Along the same lines, there are assumable loans. This is when the buyer “assumes” or takes on the existing loan on the property rather than securing their own financing.
A seller may want you to assume the loan to avoid a prepayment penalty or another reason.
Loan assumptions come with strings attached, though. You have to get approved by the original lender, which will likely require the same standards for multifamily ownership experience, net worth, etc. And there may be a fee to assume, although it’s probably a lot less than you’d spend on closing costs for a new loan.
The point of this section is that there’s no “proper way” to finance a multifamily property. If it works for you, the seller, and any lender involved in the transaction, go for it.
Hard Money loans are similar to bank portfolio loans and private money loans. Lenders can make their own rules, and in some cases, go to extreme measures.
These loans focus on transactions that can’t get approved anywhere else. There are still standards, but they are much looser than those of a traditional lender.
For example, one lender boasts that it has funded a loan for a borrower with a credit score of 350.
But just because you use a hard money lender doesn’t mean you are subprime. Sometimes there’s just something that most lenders don’t like about the transaction. For example, maybe you are acquiring a property that has an occupancy rate of 50%, you plan to manage it yourself, and you are self-employed at your day job. Perhaps it is a unique property.
There are lots of reasons many lenders won’t touch a deal, and that’s when you explore hard money.
Rates are going to be higher, and you may need more down. Loan terms could be just 6 months to a few years. In these cases, you should have a solid exit strategy to stabilize and sell/refinance within a couple years at the most. These loans aren’t without risk, but sometimes the opportunity warrants it.
Curious to see if your idea will float? Click here to connect with multiple lenders that may consider your scenario.*
Like hard money loans, bridge loans can create a bridge between property acquisition and permanent financing.
A common situation when buying an apartment complex is buying an older (“Class C”) building that needs major renovations. But you know that after rehab, you can rent out each unit for significantly more, thus adding tremendous value.
Whether you plan to hold or sell, bridge financing can help you get the property in top shape, then exit or find permanent financing.
Some common terms:
- Loan amounts $250k to $10 million +
- Loan-to-value limits based on future after-repair value (ARV)
- No DSCR minimum
- Loan terms 12-24 months
The Bottom Line
There’s no shortage of loan programs available for multifamily investors, even if you’re new to it.
Lenders are eager to find business, and there are many lenders nationwide likely willing to lend on your transaction.
If you need more help, click here to find lenders that specialize in your scenario.*
*Denotes an affiliate link. We may be paid if you end up closing a loan through this service. However, using this link does not cost you anything extra.