Funding has dried up for residential investment property (1-4 families), but is plentiful for large multi-family projects.
1. Funds are available for large multi-family properties, but not for residential investment homes.
President Obama said during his Economic Recovery Act Address, “There is no money available to you speculators,” and he meant it. Try getting a loan for a residential property (1-4 families) that is not owner-occupied and see the results for yourself. There are no more stated income loans available to residential investors. If you’ve been in the residential investing game for a while, you already know this, if you’re just getting started; You will experience this problem on your first residential investment deal. It’s cash, hard money at 12% and an LTV of 65% or you’re done for.
The good news is that government-backed funds are plentiful for larger multi-family properties. This presents tremendous opportunities for those who know how to access funding sources.
2. You do not have to personally qualify for the loan to qualify the properties.
Imagine that! Anyone who has ever tried to buy a residential investment property (1-4 family) has run into the problem of personal qualification. Sure, the rents can cover part or all of the mortgage, but the lender only considers a percentage of that income toward your ability to pay the new mortgage. You need, tax returns, financial statements, proof of funds for a down payment, etc. Not only that, but of course your FICO score becomes a big factor. Get past all of this and every time you buy another residential property, your FICO score will drop and lenders will see you as a greater risk. The more successful you are in this field, the more difficult it becomes…
With commercial financing, the properties qualify for the loan, not you. The loan is not reported to the credit bureau. The more successful you become, the easier it becomes…
3. Most loans on large multi-family properties are fully assumable.
Have you ever tried to take on a home loan without qualifying? It hasn’t happened, at least not since the early 1980s, when FHA and VA loans went from “fully assumable” to “qualifying assumable.” It’s the same as having to secure a new buy-money mortgage, so unless the interest rate is very attractive, it’s never done. The first house I bought was a small bungalow for $25,000. It was 1980, I was 20 years old, and I didn’t qualify for a $200 limit MasterCard, but I took on a $23,000 VA loan, no questions asked. The same criteria is maintained to date for large multi-family projects, but very few are aware of it.
Financing many large multi-family buildings is totally affordable. Remember, properties do not qualify the buyer. You can buy apartment complexes over 100 units without qualifying, no funds verification, no credit report, no tax returns, just knowledge.
4. You ARE NOT personally obligated to repay the loan.
Try to get a residential mortgage and tell the lender that you do not want to personally guarantee the loan. It’s not happening! We are used to all loans carrying personal guarantees. It’s built into every residential mortgage, by every lender in the country. Of course they want to appeal if you default, they get the property, and then they are entitled to a default judgment for any balance owed after the property is settled. Residential loans bring “FULL RESOURCE” to the mortgage.
Larger business loans are “NO RESOURCES” to the borrower. The property and its ability to generate cash flow is the security of the lenders, not you personally.
5. Multi-family properties are built for CASH FLOW, single-family homes are not.
Single-family homes are designed, built, and priced for owner-occupants, not cash flow. Study the numbers on almost any single-family home, and you’ll find that after you pay the mortgage, the taxes. Insurance, utilities, maintenance, etc., you will lose money every month. Single-family homes are terrible for cash flow despite what the residential gurus on TV tell you.
Multi-family properties are designed, built, and priced to do one thing, “make money.” Lenders lend based on the fact that there are sufficient funds to cover the debt obligations, not on what your credit score is, or how much the house on the block sold or what your personal income was last year, etc. .
6. Professionally Managed Property – No tenants or bathrooms to deal with.
With residential investment property, YOU usually have to manage it. For starters, the property is cash flow negative; there is probably no budget to hire a management company to manage it. You go from watching the guru on TV sitting by the pool telling you how great your new lifestyle will be once you buy a couple of houses, to getting calls about leaky roof and clogged drain problems on Saturday nights.
With the larger properties, a professional management company takes care of all of that for you. It is budgeted as well as taxes and maintenance. Lenders require a professional management contract to be in place at closing. They handle all the problems; They are staffed for this and handle repairs, rent collection, vacant rentals, etc. They send you the funds. You never have to deal with just one tenant, yet you reap the rewards. Now you have a lifestyle.
There are many more reasons to go from residential to large multi-family, including drastically increasing property value through simple rent increases, etc. I encourage anyone investing in residential property to take a good look at moving to larger properties. It is easier than you think when you acquire the knowledge.
Copyright (c) 2009 Joe Florentine
