How to Invest In Multifamily Real Estate With Little Or No Money Down
Multifamily investing may sound like a new concept to those who are new to real estate investing; but, if you have been a few times around the block already, then you will need no introduction to the golden goose that is multifamily investing! Multifamily real estate investments can grant you better cash flow, easy-to-manage resources, and generous tax breaks. Many labor under the myth that multifamily investments require substantial financial backing. But, what if we tell you that cannot be further from the truth?
Let us take a gander at a few strategies that show us how to make multifamily real estate investments with little or no money down.
7 Ways to Help You Invest in Multifamily Real Estate With Little Or No Money Down
Private money lenders
Private money lenders can be of great help when you need assistance with the down payment for a multifamily home. Moneylenders can help bail you out of a financial tight-spot for multifamily investing, just as they do for a single-family home.
It helps to know that you need not necessarily borrow from a professional lender, either; a little research may reveal that there are resourceful lenders hidden in plain sight, in your circle of family, friends, and colleagues. The prospect of the returns from a multifamily investment can be a great incentive for such lenders.
Equity share investors work a little differently than the typical money lenders. Moneylenders offer you bail-outs based on the incentive that they shall periodically receive as a return for the money they lend you.
Equity share investors lend you money based on the principle that they shall be receiving their equity portion/percentage’s worth from the monthly cash flow to the multifamily real estate, as well as from the eventual sale price of the real estate.
Hard money lenders are usually small, privatized businesses. A ‘hard money’ lender allows you to borrow the amount for your multifamily real estate investment, based on the real estate value and not your credit score. But of course, there is a catch.
Hard money lending processes usually come with a hefty interest rate and origination fee than traditional mortgages. To ensure you are not being short-changed, you have to calculate the real estate loan-to-value ratio, which is ideal at 65%, and see if it meets the lender’s terms.
Material sales can help you leverage any hidden opportunities that the real estate might hold for you. There are instances where some multifamily properties have resources and items that can be sold off to help procure a portion of the down payment, e.g., the furniture, the timber, the gravel, used, etc.
It must be noted that this is not an option viable with every multifamily investment. But, should the opportunity present itself, you would be wise to look past the real estate’s perceived value and sell the materials to pivot the down payment on the real estate.
House hacking is another sure-fire way to rustle up finances for your multifamily investment. This option is open to every investor, regardless of whether you are looking to lease or rent out or whether you are a homeowner. House hacking involves you renting out a portion of your real estate.
You could either rent a part of your current residence or the multifamily asset itself to finance its purchase. Research the laws applicable for such commercial ventures, find out if it’s more profitable to put the portion on the market for rental or as a guest lodge, how you can spruce up the part to attract tenants and guests, etc.
Repair allowance is another quick way to arrange your down payment funding. It involves scrutinizing the multifamily deal you wish to make, for necessary repairs, etc and then proposing the seller to deduct that sum from your down payment.
If the seller agrees to discount the cost of repairs instead of conducting them before handing over the keys- the most preferred solution for sellers- then you can carry out the repairs yourself and save the cost. Alternatively, you can also call repairers who offer services for a low price.
Real Estate Crowdfunding
Crowdfunding is another option that has become more popular over time. It involves several investors collectively contributing to the financing for multifamily real estate. In this way, everyone has to shell out a considerably small portion rather than a large amount for the investment.
To pique the interest of investors, you have to make a strong pitch on the asset. A strong network of experienced investors cuts down the effort you need to convince the former. A successful investment pitch can help you expand the network for future investments.
Prime Alternatives for Multifamily Home Loans
There is more than one way to finance your down payment for multifamily investing. With interest rates meandering between 4.5-12%, even investors looking to refinance their properties can avail:
Typical multifamily mortgage
A conventional mortgage is resourceful for anyone who plans to opt for a long-term loan and make at least a 20% down payment. Lenders gladly loan for assets ranging between two to four units, as anything above that qualifies as a commercial asset.
Federal multifamily loan programs from the FHA, Freddie Mac, or Fannie May are suitable for investors who cannot cough up the full down payment and don’t mind residing in one of the units of the multifamily asset.
Portfolio loans are long-term loans that grant you long-term loans for purchasing multiple properties.
Short term financing
Some investors need hard money loans or bridge loans for short-term financing. They carry high-interest rates but can help you get your real estate into shape so it can qualify for long-term loans.
Multifamily Investing: Pros & Cons In Brief
|A recurring, passive source of income||Turnover of tenants|
|Diverse sources of income from one asset||Property neglect from multiple tenants|
|All tenants benefit unilaterally from any single instance of maintenance||The cost of maintenance can be high even if one instance of major repairs is required.|
|Financing based on asset performance||Requires thorough management|
Make no mistake- multifamily investing can fall through if you are unable to come up with the minimum down payment. However, with some creative financial planning based on the strategies cited above, you can still be good for multifamily investment.