Generally speaking, it is more difficult to finance a multi-family property than a single-family home, assuming you are using traditional financing (i.e.- a bank or similar commercial lending institution). The main reason for this is due to the relative marketability of a multi-family property, compared to a single-family home. There is a bigger market for single-family homes because both investors and owner-occupants traditionally purchase them, as opposed to multi-family properties which are typically only purchased by investors. This marketability variance against multi-family properties increases the banks risk of recovering their money within a reasonable time frame in the case of default and foreclosure.
With all that said, given today’s historically low interest rates it is often a wise financial move to finance multi-family buildings rather than hold them free-and-clear. So, how do you get a multi-family mortgage?
Properties consisting of five or more units require commercial loans for multifamily purposes. Unlike single family homes, and depending on the lender, the general rule of thumb is that there must be an 80% to 85% loan to value ratio (LTV). That means that you can generally only finance 80% to 85% of the purchase price of a multi-family property whereas some single family homes can be financed with much smaller down payments.
Financing options on multi-family properties run the gamut from fixed rate, standard adjustable rate, capped adjustable rate and fixed-to-float mortgages. Interest rates are generally 0.5% to 1% higher than loans on similarly priced single-family homes.
Just like a single-family mortgage, the credit worthiness of the borrower is a prime consideration for multi-family property financing, but not the only one. For these types of loans, the lender will take into account the Debt Service Coverage Ratio (DSCR). Loosely, the DSCR is calculated by the Net Operating Income divided by the Total Debt Service (e.g., annual income / annual payments). Most lenders are looking for a ratio of 1.2% or greater, which basically means that the property is generating more than enough income to pay its debt.