JLM Blog | A Guide to Multifamily Financing and How It Works
Real Estate News, Updates, and Tips
Article published on December 23, 2022.
There is a lot that goes into the financing of multifamily real estate.
This blog post will provide an overview of the different options and introduce you to how these options work.
What is Multifamily Real Estate?
Multifamily means more than one unit in real estate, which could be apartments, condos, or even duplexes. It’s becoming increasingly popular for people who want to invest in a property where they can minimize their risk and maximize their return. Multifamily real estate in San Diego could include senior living communities, student housing, or office buildings.
It’s the difference between a duplex and a fourplex. A duplex is two separate units that share walls and a backyard. A fourplex has three units shared by common walls and a backyard. A fourplex would be the better investment since the property value would be higher and the risk is lower in terms of the number of people who live in the building. The investments are similar; however, there are different kinds of risks for each investment type.
Multifamily Real Estate is a broad term that can include real estate investments in all types of structures besides single-family homes, such as duplexes, four-plexes, apartment buildings, and condo complexes. Many people use the term strictly to refer to apartment buildings, which are multi-unit dwellings grouped as housing complexes with mutual access via common corridors. Apartment buildings are generally larger than residential condominiums and have more total units than a single-family homes.
On the other hand, it can also be a much larger property like a dormitory, which is often called “multifamily” to indicate that there are more than two units in the whole dorm. In these cases, you may need to go through a different financing process than real estate investors who buy duplexes or apartment buildings.
Real estate investors who solely deal with single-family homes and mobile homes do not usually use the term “multifamily. They are usually referred to as “real estate investors” who do 1-4 unit single-family and mobile homes.
Why is it Important to Understand the Financing Process?
Many people assume that if you buy a fourplex or a duplex, all you need to do is find a good location and put in some hard work. That’s not how it works. The financing process is much more complex than people think.
There are several options for financing multi-family real estate and each option has advantages and disadvantages that make it important for investors to understand the options before making their decision. This post will go through the main types of financing options and what they mean.
Types of financing
There are several options available to people who want to borrow money to buy an old apartment building and fix up the property. The choices will depend on whether the loan is secured by equity or a mortgage.
Equity as collateral
The most common type of financing for multi-family real estate in San Diego is equity as collateral. This is done by buying out the other investors (borrowers) in the property and paying them off later with some of the profits from rents on each unit.
Borrowers can also use a new loan from a lender. This is referred to as a mortgage and it comes with many advantages. The biggest advantage of all is that the mortgage is paid off after the project, usually after the sale of each property unit, or after a specified period. It does not require any extra payments in terms of payments to the other investors for buying them out. If the property is valued at $20 million and the loan balance is 70% of that, the loan will increase in value by $10 million after the sale.
The mortgage also has a higher interest rate than equity-based financing. It takes longer to pay off the loan and it requires more money to be paid each month for interest payments. However, some mortgages allow for fewer payments per month or an interest rate that stays consistent throughout the repayment of the loan.
For some lenders, it is more cost-effective to let the borrower just make payments on the principal without paying any interest on the loan. Keep in mind that if you are using an interest-only loan, you will still need to pay interest on the amount that is not covered by your monthly payments. This is common with mortgages.
No Money Down Payment Loan
New mortgage loans can also come without a down payment. The real estate market and process in the United States require a down payment. However, many borrowers will pay very low-interest rates because they can borrow money with no down payment. This is a common way to finance single-family homes. For larger properties, an investor will need to pay a down payment. The amount of the down payment for multifamily real estate in San Diego will depend on the type of property, how much you are borrowing, and what the market looks like at the moment.
How to choose to finance your investment
Before you make any decision on financing, you need to figure out how much you can afford to put down. Also, try to think about the type of deal that would work best for the property that you want to buy.
Is the property a duplex? In this case, it might be better to do an equity-based or a mutual mortgage because of the lower interest rate and faster payoff time.
Is the property a fourplex or larger? In this case, it might be better to use a mortgage with a low down payment.
Interest-Only and no-money-down loans are not as common, but they could be used for some of the financing strategies. Investors who plan on flipping the property for profit may want to choose an interest-only loan because of the lower monthly payments that can be put into maintenance, repairs, and upgrades on the property.
By now you should have a good idea of how to get financing for your multifamily real estate in San Diego. You need to understand the differences between equity-based and mortgage-based loans, and how they will affect your strategy. The bottom line is that each type of loan has its advantages and disadvantages and you need to consider them before making an offer or signing any paperwork.
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