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It is easier to finance a $5,000,000 apartment building than a single-family investment property

Funding has dried up for residential investment property (1-4 families), but is plentiful for large multi-family projects.

1. Funds are available for large multi-family properties, but not for residential investment housing.

President Obama said during his Economic Recovery Act Speech, “there is no money available to you speculators,” and he meant it. Try getting a loan for a non-owner-occupied residential property (1-4 families) and see the results for yourself. There are no more declared income loans available to residential investors. If you’ve been in the residential investment game for a while, you already know this, if you’re just starting out; you will experience this problem in your first residential investment deal. It’s cash, 12% hard money and a 65% LTV or you’re done.

The good news is that government-backed funds are plentiful for larger multi-family properties. This presents tremendous opportunities for those who know how to access funding sources.

2. You do not have to personally qualify for the loan that the properties qualify for.

Imagine that! Anyone who has ever tried to purchase a residential investment property (1-4 families) has encountered the problem of personal qualification. Sure, rents can cover some or all of the mortgage, but the lender only considers a percentage of that income toward your ability to pay the new mortgage. You need, tax returns, financial statements, proof of funds for down payment, etc. Not only that, but of course your FICO score becomes an important factor. Get over all of this and every time you buy another residential property, your FICO score will drop and lenders will see you as a higher risk. The more successful you are in this field, the more difficult it becomes…

With commercial financing, the properties qualify for the loan, not you. The loan is not reported to the credit bureau. The more successful you become, the easier it becomes…

3. Most loans on large multi-family properties are fully assumable.

Have you ever tried to take on a home loan without qualifying for it? It hasn’t happened, at least not since the early ’80s, when FHA and VA loans went from “fully assumable” to “assumable qualifying.” It’s the same as having to secure a new buy-money mortgage, so unless the interest rate is very attractive, it’s never done. The first house I bought was a small bungalow for $25,000. It was 1980, I was 20 years old, and I didn’t qualify for a $200 limit MasterCard, but I took on a $23,000 VA loan, no questions asked. The same criterion is maintained to date for large multi-family projects, but very few know about it.

The financing of many large multi-family buildings is fully affordable. Remember, properties do not qualify the buyer. You can buy apartment complexes over 100 units with no qualifications, no background checks, no credit report, no tax returns, just knowledge.

4. You ARE NOT personally obligated to repay the loan.

Try to get a residential mortgage and tell the lender that you don’t want to personally guarantee the loan. It’s not happening! We are used to all loans carrying personal guarantees. It’s built into every residential mortgage, by every lender in the country. Of course they want to appeal if you default, they get the property and then they are entitled to a default judgment for any balance due after they settle the property. Residential loans carry “FULL RESOURCE” to the mortgage.

Most large business loans are “NO RESOURCE” to the borrower. The property and its ability to generate cash flow is the security of the lenders, not you personally.

5. Multi-family properties are built on CASH FLOW, single-family homes are not.

Single family homes are designed, built and priced for owner occupants, not cash flow. Study the numbers on almost any single-family home and you’ll find that after the mortgage is paid, the taxes. Insurance, utilities, maintenance, etc., you will lose money every month. Single-family homes are terrible for cash flow despite what the residential gurus on TV tell you.

Multifamily properties are designed, built, and priced to do one thing, “make money.” Lenders lend based on the fact that there are sufficient funds to cover the debt obligations, not on what your credit score is, or how much the house down the block sold for, or what your personal income was last year, etc. .

6. Professionals manage the property – There are no tenants or bathrooms to deal with.

With residential investment property, generally YOU have to manage it. To begin with, the property has a negative cash flow; there is probably no budget to hire a management company to manage it. You go from watching the TV guru sitting by the pool telling you how great your new lifestyle will be once you buy a couple of houses, to getting calls about leaky roofs and clogged drain issues on Saturday nights.

With larger properties, a professional management company takes care of all of that for you. It is budgeted as well as taxes and maintenance. Lenders require a professional management contract to be in place at closing. They handle all the problems; they are staffed to do so and deal with repairs, rent collection, vacant unit rentals, etc. They send you the funds. You never have to deal with just one tenant, yet you reap the rewards. Now you have a lifestyle.

There are many more reasons to go from residential to large multi-family, including drastically increasing property value through simple rent increases, etc. I encourage anyone investing in residential property to look closely at moving to larger properties. It is easier than you think when you acquire the knowledge.

Copyright (c) 2009 Joe Florentine

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