When it comes to financing your apartment property, there is no shortage of sources to choose from. Most people immediately think of banks when they think of financing, but the market has evolved and there are a lot of other sources. Not knowing your options can result in you leaving money on the table. Picking the right financing option is critical to your success. We’re here to help you understand your options so you can determine the best one for your financing needs.
When we say “agency lending”, we’re talking about Government-Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac. These two are lesser-known players in the small balance space, but they’re quickly gaining more market share. Fannie Mae’s small multifamily loan originations grew 78% from 2018 to 2020 alone.
Many people don’t know Fannie Mae and Freddie Mac offer desirable financing terms, including long-term, non-recourse, maximum leverage, fixed-rate loans for smaller apartment properties. They lend across a variety of property types, including manufactured housing, affordable, mixed-use, conventional, and green.
Because their mission is to help provide workforce housing, the agencies have a government mandate that requires them to provide liquidity to the market at all times – regardless of economic or geopolitical factors. Pricing may change circumstantially, but unlike other players that may pull back in the face of uncertain market conditions, Fannie Mae and Freddie Mac will remain consistent.
To secure an agency loan, a prospective borrower must go through an authorized agency partner, which is also considered a direct lender. There are a limited number of agency partners that you can work with, W&D being one of them! This is an attractive program if your property qualifies.
Bank lending has historically been the most common way to secure a loan. Banks provide multifamily loans throughout the U.S., each with a lending program unique to the scope of their business practice. Banks are licensed to provide loans only within certain regions, and unlike the other sources, they typically require recourse, which means your personal assets are on the line. There are also borrower exposure limits that must be taken into account. But overall, if you’re looking for a local lender, favorable rates, and are comfortable with recourse, banks might be a viable financing option.
Life insurance companies are another option for financing your small apartment property with their longer loan term options, large loan sizes, early rate lock options, and competitive interest rates. However, when it comes to leverage and cash-out refinancing, they are less competitive. They are also a bit more selective and gravitate toward higher quality assets in major markets.
CMBS are fixed-income investment products that are backed by mortgages and provide liquidity to real estate investors and commercial lenders. CMBS loans are available to a wide range of borrowers, including those that may be excluded from traditional lenders due to poor credit, previous bankruptcies, or strict collateral or net worth requirements. They offer high leverage, non-recourse loans, however, CMBS loans can be difficult to pay off early and the post-closing requirements are more stringent.
HUD offers major benefits, including non-recourse, high leverage, longer term, attractive pre-payment penalty, and low rates. While HUD loans have their benefits, they are also often misunderstood. People mistakenly believe that loans are only available for low-income housing, nonprofits, and affordable housing projects, but this is not the case, and many market-rate borrowers may be missing out.
Banks are considered a primary lending source in the market today, but other options exist that may align better with your investment strategy. It’s critical to know your options or you may be leaving money, flexibility, or better terms on the table. For more information, download our Insider's Guide to Multifamily Financing. To see more of our capabilities or to receive a quote in minutes, check out our website.