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As real estate investors, understanding the landscape of financing options is paramount to securing profitable deals. While the market offers a diverse array of lending products—from conventional bank loans and DSCR loans to hard money and private money—the terms can vary wildly depending on the asset class, size, and location.
Today, we're pulling back the curtain on a specific deal to give you a real-world look at multi-family financing. This insight comes straight from the negotiating table, with data provided by a prominent commercial lender and the debt arm of Colliers, one of the largest real estate services companies globally.
The Deal: A 31-unit apartment complex in Milwaukee, Wisconsin, with a purchase price of $7.3 million.
It's crucial to understand that these specific rates and terms are tailored for a deal of this magnitude. Smaller multi-family properties will generally see different qualification criteria and pricing.
Current Lending Options for This $7.3M Multi-Family Acquisition:
Here’s a breakdown of the financing proposals we recently evaluated:
Landmark Credit Union: A strong local banking partner.
Rate: 6.00%
Amortization: 30 years
Term: 5 years (meaning the loan matures and needs to be repaid or refinanced after 5 years)
Minimum Down Payment: 20%
Fannie Mae (with Max Buy Down): A robust option through a government-sponsored enterprise (GSE), often favored for its competitive rates and favorable terms for stabilized properties.
Rate: 1.95% over the 5-year U.S. Treasury (UST)
Max LTV (Loan to Value): 65.0%
Minimum DSCR (Debt Service Coverage Ratio): 1.25x
Interest Only (IO): 3 years
Amortization: 30 years
Prepayment: Yield Maintenance, with the last 6 months open at Par
Commercial Mortgage Backed Security (CMBS): A securitized loan, pooling many individual loans into a bond. These can offer attractive terms, particularly for larger, stable assets.
Rate: 2.50% over the 5-year UST
Max LTV: 60.0%
Minimum IO DSCR: 1.25x (DSCR calculated during the interest-only period)
Interest Only (IO): Full IO
Prepayment: Defeasance, with the last 4 months open at Par
LifeCo (Life Insurance Companies): These institutions are known for providing long-term, stable financing for high-quality commercial real estate assets.
Rate: 2.00% over the 5-year UST
Max LTV: 55.0%
Minimum DSCR: 1.30x
Interest Only (IO): 2 years
Amortization: 30 years
Prepayment: Yield Maintenance, with the last 6 months open at Par
Beyond the Numbers: The Power of Relationships and Partnerships
While these numbers provide a clear picture of potential financing, the ability to secure such terms often comes down to more than just the property itself. Building strong, personal relationships with commercial lenders is invaluable. These relationships help you:
Understand Lender Requirements: Most of these sophisticated lenders have specific qualification criteria for borrowers, including minimum experience, liquidity, and net worth. Knowing these upfront can save you significant time and effort.
Stay Ahead of Market Trends: Lenders are on the front lines of market shifts. Your relationships can keep you informed about current rates, terms, and new lending products as they emerge.
What if you don't personally meet all the lender's requirements? That's where strategic partnerships come into play. You can partner with a qualified individual, often referred to as a Key Principal (KP), who brings the necessary experience and financial strength to the table. This is a common strategy in larger deals.
Finding these crucial partners is a key part of my strategy. Through my involvement with groups like Grant Cardone's Real Estate Club and consistent attendance at dozens of networking events and real estate conferences each year, I connect with highly qualified individuals—some of whom are likely reading this blog post!
Glossary of Key Lending Terms:
To help you navigate these discussions, here’s a quick reference for some of the common terminology:
5-year UST: This refers to the yield on the 5-year U.S. Treasury bond, which serves as a common benchmark for commercial loan interest rates. You can track this at CNBC US5Y.
LTV (Loan to Value): The maximum percentage of the property's value that a lender is willing to finance. For example, a 65% LTV means you’ll need at least a 35% down payment.
Max Buy Down: An option where you pay "points" (an upfront fee) to the lender in exchange for a lower interest rate over the loan's term.
5-Year Term: The period of time before the loan matures and the full principal balance becomes due, requiring either repayment or refinancing.
Prepayment at Par: Allows you to pay off the loan balance without incurring any prepayment penalties. "Last 6 months open at Par" means this flexibility applies during the final six months of the loan term.
IO (Interest Only): A payment structure where you are only required to pay the interest on the loan for a specified period, leading to higher initial cash flow and typically a higher DSCR.
DSCR (Debt Service Coverage Ratio): A vital metric indicating a property’s ability to generate enough income to cover its debt payments. Lenders use it to assess risk; generally, a higher DSCR is more favorable.
Yield Maintenance: A common prepayment penalty designed to compensate the lender for any loss of interest income if the loan is paid off early. The penalty amount ensures the lender achieves the same yield they would have if the loan had run its full term.
Defeasance: Another type of prepayment penalty, often more complex and costly than yield maintenance. It requires the borrower to replace the collateral of the original loan (the property) with a portfolio of U.S. government securities that generate cash flow equivalent to the remaining debt service on the original loan.
LifeCo: An abbreviation for Life Insurance Companies, which are significant long-term lenders in the commercial real estate space, particularly for stable, high-value assets.
Let's Connect!
I'd love to hear your thoughts and answer any questions you have about these financing options.
Feel free to message me directly or book a one-on-one call. You can also simply shoot me a text. Contact me and connect with me on my socials HERE.
And if you're an experienced Key Principal—let me know so I can reach out to you for the next deal!
As always, it’s your life, your canyon, your legacy. YOU are in control. Let’s flow!
Disclaimer: The Flow Authority makes no promise or guarantee of any results, money, success, or lifestyle from learning real estate investing strategies. The information provided in this blog is for educational and informational purposes only and should not be considered financial, legal, or professional advice. The views expressed in this blog are those of the author and do not necessarily reflect the official policies or positions of any organization, government agency, or financial institution. Any personal experiences shared are for illustrative purposes only and may not apply to every person’s situation. This information is general, not personal. Seek specific advice from a licensed professional for legal, financial, and business decisions. There are no typical results in real estate investing; every person, property, and transaction is unique. The information shared in this blog is believed to be truthful, accurate, legal, moral, and ethical, and is subject to change.