RG 060 – Multi-family financing 101 with Michael Becker
About Michael Becker
- Michael is the senior director at Old Capital Lending in North Texas.
- Michael used to be an under writer at Wells Fargo.
- While he was writing loans he realized he was on the wrong side of the transaction so he quit to become an investor.
Nuts and Bolts
Michael Becker is the senior director at Old Capital Lending where he offers a large range of financial
services from underwriting, marketing and analysis. He also invests in a range of real estate assets including multifamily, commercial, medical, land and shopping centers. He is specifically knowledgeable about multifamily real estate investment and knowing how different banks look at deals before they say yes to financing. Michael explains that multifamily housing is such a safe investment because housing is a universal need and the economy of scale is better when you purchase a lot of units. He also notes that you’re more likely to get favorable financing for multi families from the government because housing is a core issue.
2 types of multifamily financing
When approaching a bank for multifamily financing there are 2 main categories; traditional bank or agency financing (for example Fannie Mae). The traditional bank takes money from everyday checking accounts and loans it to other people, it them holds these loans on sheets in house and doesn’t sell them to Wall Street. These banks will look to give loans to people in the geographical vicinity because they will want to have a presence in the market they loan on. They will also need personal guarantees and want a 5-7 year term with maximum 25 year amortization. These banks do not require escrow and don’t go over the 75% loan to value or loan to cost. However, Fannie Mae and similar agency financers will loan at 10-12 year terms with 30 year amortization, these loans are also non-recourse which means no personal guarantors. They also require escrow for monthly taxes and up to 80% loan to value.
Credit, rates and assets
There are also other differences between the two types of financings. For example an agency will only give a loan for a stable asset, which is one that has had 90% occupancy for the last 90 days and is producing a regular monthly cash flow. Community banks will loan on unstable assets as long as it makes business sense. Another difference in lending types is based on the credit of the borrower. An agency will treat the borrower as the most important element in the loan and the asset isn’t really taken into account, whereas this is completely reversed in a community bank. However a traditional bank will give a loan to a person with no previous multifamily experience, but Fannie Mae requires a key principle signer to have experience. At an agency you need to have a 1.25 debt coverage ratio.
The future of multifamily
Things are changing in the world of multifamily property investment as all property values have been increasing. As the local economy does well this increases the rental price especially as people take advantage of low interest rates to invest in more assets. At a community bank they will fix your interest rates on the bases of prime rates plus spread, however an agency will do a 10year treasury plus a spread. Michael lives by the rule that there should be a 2% difference between CAP rates and interest rates, although this difference can be developed as you increase the value of the property after purchase. After the recent presidential elections the interest rates have increased dramatically and Michael predicts that if these don’t slow soon then they will cause CAP rates to creep up which will cause a slowing of transactions. Michael advises that you stick with what you know, in his case multifamily, and stick with long term fixed rate financing. He also suggests that you always keep money aside for times when an AC unit fails or you need to buy a new fridge.
contact – email@example.com
podcast – Old Capital Real Estate Investing