Buying leverage multi-family properties Darrel Dickson of ApartmentForSale.com and Preferred Capital Management, Inc.
Fannie Mae will allow secondary financing behind an 80% loan to value on a multifamily purchase. If the seller is willing to provide secondary financing of an additional 15% of the purchase price behind the Fannie Mae loan you may be able to obtain a total of a 95% loan-to-purchase price. That means there is a way to purchase a large multi-family apartment complex with only a 5% down payment! If you are a real estate broker and are working directly with the seller and obtain a 5% commission plus obtain the 95% financing, there is a way to purchase a large multi-family apartment complex with nothing down! Keep in mind that these properties have to have excellent cash flow to cover the debt service, so you need to be careful in doing your underwriting. Make sure that there is plenty of cash flow to meet the operating expenses as well as the debt service on highly leveraged deals prior to a purchase. We still have historically low interest rates. If you are purchas-
ing a multi -family property that has restrictions under section 42 of the Internal Revenue Service for the next thirty years, it is possible to obtain a thirty year fixed rate fully amortizing loan from Fannie Mae’s affordable housing loan program. Obtaining a fixed rate fully amortized loan over thirty years can save a substantial amount of money over time by limiting refinancing costs, and also eliminates the risk of higher future interest rates States have low interest rate affordable housing loans available through community and economic development departments. The loans are overseen by the federal housing trust program. There are opportunities to assume these low interest rate loans on multi -family properties that are administered by the housing trust program. These loans may be subordinated to new Fannie Mae multi- family loans. The state loans are at rates as low as 2% and are also fully amortizing loans. This is an opportunity for multi -family apartment complex investors to obtain extreme leveraging multifamily properties with
12 Apartment Market Digital • Fall 2013
fully amortizing loans at low interest rates. The time to call on sellers is after the 15th year of the original funding of the community economic loan. Often times the developers have operating agreements that call for the sale of these assets after the 15th year. Keep in mind these deals are very difficult and take a lot of time to execute and usually the lenders want to get paid off, and do a new loan versus keeping their funding in the existing project. Also there are risks associated with owning section 42 properties. Do your home -work, and hire professional attorneys, CPA’s and brokers that specialize in section 42 properties to get the best advice. Another advantage of obtaining fully amortizing financing is to avoid the difficulty of closing on a loan that has yield maintenance burning off and the loan has requirements to close on a specific date. Failure to close by the exact date will throw you into default on your existing loan. Your existing lender may try to
www.apartmentsforsale.com