Multifamily has always been the favorite asset class for the majority of private mortgage lenders, but there are a number of challenges in the current environment which are making it difficult for private lenders to fund multifamily deals in 2023. In this guide, I’ll explain how most private lenders are viewing multifamily deals this year, what the current interest rates are, and the maximum leverage offered by private lending companies, which are also known as hard money lenders or bridge lenders.
The Private Lending Landscape for Multifamily
The reason multifamily has historically been a highly desirable asset class for private mortgage lenders is they are generally easy to rent since everyone needs housing, and there are tons of long-term financing options offered by conventional lenders, plus there is a government backed secondary market for multifamily properties.
Most private lenders are always thinking about what would happen if the borrower defaults on the loan and it results in a foreclosure. Since they have historically been so easy to sell, lenders are typically not worried about the prospect of taking back a multifamily property in the worst case scenario.
The majority of private lending firms in the United States focus on residential investment properties with 1 to 4 units, but almost all of them will lend on multifamily properties. Some only consider smaller multifamily up to 10 units. Others don’t care how many units there are, so long as the deal doesn’t exceed the maximum amount they can lend.
There is another sector of private lending that focuses on commercial real estate, and ALL of those lenders offer short-term loans for multifamily properties. Many of them offer rehab loans for multifamily value-add projects, and I know a few lenders that are 100% focused on these types of deals.
Historically, most of the commercial real estate private lenders have offered a higher maximum loan-to-value for multifamily as opposed to other asset classes. I can give you a common example with private lenders in our network…
For the purchase of a stabilized multifamily property, a lender would fund up to 75% of the purchase price, but for all other commercial property types, the maximum would be 65%. For multifamily value-add projects, private lenders would typically fund 80% to 85% of the purchase price, plus 100% of the rehab budget, so long as the loan amount is not more than 75% of the completed value. The reason that private lenders will go that high is the permanent financing will typically go up to 75% or 80% LTV.
Multifamily Challenges in 2023
For multifamily properties, private lenders always assess the long-term financing options available to the borrower since that’s the exit strategy for the short-term bridge loan. Even if the borrower plans to rehab and sell the property, the end buyer will likely need permanent financing. If the deal doesn’t pencil out to qualify for long-term permanent financing, then most private lenders will be reluctant to offer a bridge loan. And this brings us to the 3 primary concerns that private lenders have with multifamily properties in 2023.
Since interest rates started skyrocketing last year, it’s become harder for multifamily investors to qualify for permanent financing. Most lenders require a debt service coverage ratio (DSCR) of 1.2, but the high interest rates are putting some deals into a negative DSCR which is killing a lot of purchase transactions.
And that leads us to the second major concern that lenders have which is multifamily cap rates are too low, and values need to fall in order for purchase deals to make sense. Some lenders are anticipating that values will start to come down this year, which means that lenders will be more conservative with their maximum loan-to-value.
The third concern that many private lenders have is there will be too much multifamily supply this year due to overbuilding in various markets throughout the country. As many of the large apartment construction projects are completed and hit the market, it could cause market rents to drop. This dilemma will only affect certain parts of the country, but it’s another challenge that might contribute to a decline in multifamily property values.
Many Multifamily Investors Using Private Lending in 2023
Many multifamily investors are turning to private lending this year to get deals done and to buy time until interest rates go back down. For a purchase bridge loan, investors may need to put more cash into the deal than they are used to. Most lenders are requiring a 30% to 35% cash down payment.
Multifamily investors that have a loan maturing this year are in a really tough spot. If they can afford to pay the high interest rates, a bridge loan may be a solution for up to 2 years, but the maximum LTV will likely be 65% to 70%. And most lenders are not offering cash out when refinancing a maturing loan. To get cash out in this environment, the loan-to-value would likely have to be under 60%.
I don’t see many lenders promoting ground-up construction financing for multifamily this year, but many private lenders are still funding multifamily rehab value-add projects. The loan-to-purchase and loan-to-cost hasn’t changed much for most lenders. You typically need to contribute 20% to 25% cash to the purchase, and the lender will fund the rest.
However, the after-repair value requirement is likely to be lower than what it was in the past. I see some lenders still advertising a maximum loan-to-completed value of 75%, but this number is really dependent on whatever qualifies for permanent financing. It’s not possible to determine this number until the lender does a full analysis of the deal. They need to review the rent roll, expenses, market rents and much more.
In January 2023, I visited I Fund Cities‘ office in Philadelphia and learned they are still funding ground-up construction loans for multifamily properties in many markets throughout the country.
Private Lending Interest Rates for Multifamily Properties in 2023
As of February 2023, the interest rates for most multifamily bridge loans are in the range of 9% to 11%. You may find a handful of lenders in California that can go lower. For example, one lender in our network, Diversified Mortgage Co., is currently lending the high 7’s for multifamily properties in California, and they offer a 2-year or 4-year loan term. Most bridge loans max out at 2 years, but a few lenders in our network are fine with longer terms.
One private lender in our network, IceCap Group, recently launched a DSCR loan program just for multifamily deals. The loan terms are either 3 years or 5 years, and the interest rates are currently in the 7% to 8% range for most deals. This program is offered in most states throughout the country, but the maximum loan amount is $5,000,000.
Obviously, Private lending Interest rates may increase throughout this year if the federal funds rate goes up. I’ll continue to publish new guides and videos updated every quarter as the market changes.
How to Find Multifamily Private Lenders
If you’re ready to search for a lender for a multifamily deal, use our website PrivateLenderLink.com as a resource. All the private lending companies listed on the site have a very detailed profile that shows their lending guidelines, and you can contact each lender directly. There are two options for using our platform.
Option 1: Browse Lenders
Search on our site for direct lenders. All lenders have a very detailed profile with information about their lending guidelines, rates, fees and much more. Make contact with each out directly by email, phone call, or visit their websites. First select a loan type, then enter the state where the property is located.
Option 2: Create a Loan Request
Fill out a questionnaire with information about your financing needs. You can then browse lenders and invite a few of them to view your deal. Or ask us for recommendations; we’ll review it and invite a few select lenders that we feel may be a good fit.
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