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A Closer Look at Multifamily Financing

This issue highlights a major distinguishing characteristic for 2-4-unit properties versus larger complexes.

Properties up to 4 units qualify for conventional 30-year (or 15-year) fixed-rate loans. These loans are straightforward and reasonably easy to get done. They are most often backed by Fannie Mae and Freddie Mac and are essentially the same type of mortgages as those on a personal residence. The loan pricing is slightly higher for investors. Qualification standards and loan-to-value (LTV) ratios have some variations, but nonetheless, they are extremely attractive mortgages. At today’s interest rates right around 3%, a leveraged acquisition can generate a nice cash flow.

For properties greater than 4 units, the financing market is a different world. There are many providers for this type of commercial financing, and the process and loan terms can vary significantly from lender to lender and property to property. In general, these loans do not exceed a 10-year term and interest rates tend to be variable rather than fixed. This creates interest rate and financing risk, especially when the loan becomes due in 10 years. Interest rates for these types of mortgages are still very attractive in today’s environment.

In 2020, COVID created some havoc in this market, and these loans became much more difficult. Lenders perceived higher risk and, in some cases, stopped making loans altogether. LTV ratios were reduced significantly requiring more equity, and onerous reserve requirements were put in place. The expectation is that this market will return to more normalcy as COVID tends to resolve in 2021.

30-year fixed-rate conventional investor financing was 2.875% to 3.25% as of January 4, 2021. 75% maximum LTV. (Source: Tim Maher, Cascade Mortgage)

The Compass Commercial Multifamily Brokerage Team specializes in Central Oregon multifamily properties of all sizes and types from duplexes to 200+ units. We track sales, rental statistics, vacancy rates and more in the multifamily sector.

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