Real Estate Investment Loans

Lending and financing can be a great way to fund or start your real estate investment dreams. Especially if you do not have a huge amount of cash readily available to invest in real estate, this could be an option for you. Many investors today use loans in order to make huge investments and start out in the business.

Real estate investments loans are very common today and allow you to fund the purchase of real estate. Knowing how the market works and understanding how to invest in real estate is key in order to avoid racking up significant debt from real estate. Like with any loan, it is important to know all of the terms of your financing and how it will impact your overall financial health. Doing your research and understanding all of your lending options is vital to getting the best deal when it comes to your real estate loan.

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I have compiled a wide variety of information, articles, and advice on the topic of lending and financing in real estate. With years of industry expertise and knowledge, I am ready to help guide you through the process of becoming a successful real estate investor and ultimately helping you to reach financial freedom.

Build great real estate investment strategies with my help!

Infinite Banking 101: Confidently Grow and Store Your Wealth

Infinite Banking 101: Confidently Grow and Store Your Wealth

We met with Gary Pinkerton, a successful investor and a wealth strategist at Paradigm Life, to discuss the strategy of infinite banking. Through Pinkerton’s deep knowledge of how insurance companies work and his extensive expertise in other critical areas of personal finance, he has assisted his clients with the purchase of investment properties while also helping them to elevate their net worth.


The Need to Store Money

The underlying concept of infinite banking is that everyone needs to store cash for various reasons. This is not money that is earmarked for investments. Instead, it is money that is being saved for a specific purpose. For example, it may be used as a rainy-day fund, a reserve for business activities, a reserve for real estate investing activities, and other similar purposes.

For many people, the money that they don’t want to place in at-risk investments sits relatively idle in a checking or low-interest savings account. Often, the savings rate doesn’t beat the inflation rate. Through the strategy presented by Pinkerton, you can potentially reposition your banking activities so that this money grows at a healthy rate of up to 5% annually.


The Concept of Infinite Banking

Insurance companies accept monthly premium payments for each policy they underwrite. They grow these funds on behalf of their customers, and the growth rate may be as high as 5% in many cases. Generally, when you buy a whole life insurance policy, you are presented with a guaranteed rate of growth and an upper limit on growth. Often, the actual growth rate falls somewhere in between the margins.

The insurance companies pool together all of the premiums collected into a large fund, and the money is safely invested back into the economy. A portion of this growth is then returned to the policyholders. This is the mechanism behind whole life insurance policies.


A Better Way to Grow Money

One of the unique features of whole life insurance policies is that the growth accumulates tax-free. The policyholder can borrow against the money that he or she has already contributed to the policy without any tax penalty. Essentially, if you have contributed $10,000 in premiums, you can draw against this $10,000 at any time without facing a tax consequence. If you pull out any of the growth, which would be any amount over $10,000 in this case, the excess would be taxed. The taxation is at the same rate that your savings account’s interest would be taxed.


Unhindered Access to Your Cash

You can see that infinite banking provides you with a convenient way to grow your money at a higher interest rate than a savings account provides. At the same time, this is a no-risk investment opportunity with a guaranteed rate of return. More than that, the interest rate generally fluctuates within upper and lower limits based on market conditions, so it often is aligned well with the inflation rate at any given time.

You can enjoy all of these incredible benefits associated with building wealth, and you can do so while still enjoying unhindered access to your cash. In fact, you can always draw on your initial capital when you need it, and you can return it to your account through your regular premium payments in the same way that you would continue to contribute regularly to your savings account. Even if you draw your original capital out, the full amount of your original contribution will grow at the same rate. This is essentially similar to saving money in your savings account in many ways, but it allows your funds to grow at a much faster rate even when you tap into them.


The Added Benefit of Life Insurance

Unlike term life insurance, whole life insurance has a guaranteed death benefit. Your beneficiary will receive that benefit at the end of your life, and this is similar to the way that an heir may receive other assets at the time of your death. Because of this, a whole life insurance policy is a true asset as well as a savings vehicle.

Keep in mind that the life insurance proceeds can also be applied to a church, a charity, or other beneficiaries. This flexibility gives you the ability to allocate funds as designated. Even if you have taken out a loan against the policy that has not yet been paid off at the time of your death, there is a built-in death benefit. Plus, the policy’s proceeds will also pay off any outstanding balance, so there is never a risk of passing debt onto heirs.


A Cash Reserve

While the initial capital in the life insurance policy can grow slowly over time with regular premium payments, you also have the option of contributing a lump sum of cash to the policy. This essentially enables you to borrow a much larger amount of money without incurring tax penalties. At the same time, the full contribution amount is growing at a decent rate. While some people will draw the full contribution amount out for real estate investing and for other purposes, others will keep a reserve. This reserve can be used for a rainy-day fund or for other essential purposes. Generally, you can tap into the reserve within a few days, so the funds remain easily accessible.


Is infinite banking a smart strategy for you? After you learn more about it, you can consider buying a whole life insurance policy to experience the strategy’s powerful benefits for yourself.


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Are You Asking the Right Questions When It Comes to Private Investments?

Are You Asking the Right Questions When It Comes to Your Private Investments?

I am not much for sizzle, glamour, or sensational TV. However, now and again my teenage daughter will put something in front of me that grabs my attention. Have you seen the Nightbirde ditty from America’s Got Talent on YouTube? You should take a moment; it is touching. When competing as a singer on AGT, artist Jane is asked about her life. Her answers are jarring and painful. What follows is amazing.

This grabbed my attention because, without the panelists’ questions of the artist, the performance would have been sensational. But within the context of Jane’s life circumstances, her performance was beautifully profound. My point? The right questions allowed the audience to experience the strength of an undaunted human spirit mired in the most challenging tragedies of human life.


Asking the Right Questions

Hitting closer to home, you too must ask the right questions related to your private investments (think self-storage, multifamily, and industrial). The art of finding the right question is critical as you determine value and find facts and truth.

As you approach investment opportunities, you face a significant risk because your assumptions about how the investment will function might not be accurate. Oftentimes in life, the subject matter is awfully complex. How are we to know the right answer when we see it if our assumptions are flawed?

I will return to this point at the end of this article, but let me stress this again: If the assumptions we make about how the asset will function are invalid, we face a meaningful risk in the world of private investments.


Unpacking the World of Private Investments

My dear wife Melissa works at a biotech company. When she talks to her colleagues, I do not have a clue what they are talking about other than they are trying to make drugs that cure cancer. Recently at a post-COVID gathering with friends, I started talking about prohibited transactions in IRAs. Melissa gently pulled me out of the weeds, reminding me that a subject matter that is common ground is a better place to spend time socially.

Thank goodness I married up and can rely on her to be my guardrail in life. She was spot on and is better at reading social cues than I am. I was off in the weeds on a topic nuanced with smart-sounding 20-dollar words, enjoying myself as I put on a clinic of technical precision and accuracy. Everybody else was thinking, What a dork.”

I mention this because many areas of life are specialized. And not just a little. The world of private investments can be one of these areas. Let’s focus on a topic that is often confusing to investors and packed with 20-dollar words. Just as Melissa’s world of oncology is a maze of SOPs, tangled multinational partnerships, and real people who are dealing with cancer, the world of private investments also needs to be understood, evaluated, and unpacked.


The “Safe” Investments That Led to the Great Recession

Back in the ’80s and ’90s at banks and brokerage firms, investors frequently purchase mortgage-backed bonds. These bonds were called Ginnie Mae, Freddie Mac, and Fannie Mae bonds. These bonds are still around today, but the shine partially faded due to the Great Recession.

Remember 13 years ago (2008–2010) when we first heard about TARP (Troubled Asset Relief Program) from Hank Paulson? He was our Secretary of the Treasury at the time, as well as the former Goldman Sachs Chairman and CEO.

Back then the mortgages were packaged and sold as presumably safe investments. What we discovered in the great recession was that these packaged, mortgage-backed securities were not actually the high-quality collection of mortgages they were presumed to be. Frankly, they contained poisonous high-risk mortgages that subsequently defaulted. Think Countrywide Financial, civil fraud, and Angelo Mozilo. Creepy stuff.

Remember that home mortgages are assets that are bought and sold by various banks, institutions, and entities as their marketability provides the liquidity needed by the underwriter. The underwriting entity can package a tranche of home loans and sell them into the market and go back to new borrowers to underwrite additional loans, then rinse and repeat.


Chasing Cash Flow

Investors viewed these packaged loan portfolios as reasonable and safe assets for investment. Investors would frequently purchase GNMA bonds (often referred to as Ginnie Mae) with the anticipation of using the cash flow provided by the asset to service lifestyle needs.

Where it gets tricky for investors is when a mortgage in the tranche is refinanced. Think about it — when a mortgage is refinanced, the lender is repaid their principal as a new lender now carries the note. In the context of a GNMA bond, the investor receives a portion of their original principal back as the borrower is no longer paying interest since the debt has been paid.

To the investor, the sum of the monthly cash flow is higher than the bond’s anticipated yield due to mortgages in the tranche being refinanced. But because the principal was mixed in with the interest payment on the bond, the investor did not care. They just knew they liked the cash flow, and the cash flow was relatively high. Until that is, they realized the remaining principal was less than what was originally invested.

That was when it got tricky. If you expected to receive a payoff of $50,000 at the maturity of the bond, which equaled what you invested, you would be disappointed when you received something less.


Your Capital Account

Some private investment syndicators apply a similar approach when accounting for the invested principal. Here is some terminology to be watchful of. Not that the following is wrong, it is just a distinct way of handling things:

“Any capital that is returned on the aggregate is considered a return of capital.”

What this means is that your capital account will be diminished during the life of the investment. That is not to say that your ownership is diminished — just your capital account. So, if you invest $50,000 in a deal with the assumption that you will participate pro rata in the gains at the end of the deal, plus receive your original principal back, you will be disappointed.

In the above scenario, you will most definitely participate in the gains on the investment as your ownership does not change based on the balance of your capital account. It is just that, because your principal is being returned to you during the life of the investment, you will not have a singular event where you receive the original amount invested being returned to you.

Additionally, your preferred return, if contingent on the balance of your capital account, will cash flow less to you each month/quarter based on the decreasing balance of your capital account. This may be significant. Admittedly, cash will build more quickly in an investment where the burden of preferred payments declines. Your ownership remains the same, so you eventually get the bucks. Only you can determine which you prefer.


Thinking Beyond the IRR

Remember that the Internal Rate of Return (IRR) calculation of your investment is only one method for measuring performance. Strong IRR numbers can be impacted by providing a return of principal early on. I feel the truest measure of performance of an investment is the equity multiple within the context of the number of years for the life of the investment. In other words, an equity multiple of 2 within 5 years tells me almost everything I want to know. An IRR of 18 only tells me part of what I want to know.


Final Thoughts

Now, please re-read the second paragraph of this article. My advice? Before you talk with an investor relations representative about a private investment, compile a list of your assumptions, and during your conversation, ask the representative to validate or contradict those assumptions.

Investors make their best decisions when they are well informed. Talk to your friends and ask for their advice. Spread your investments out in position sizes of 2% to at most 10% of your net worth, and diversify by year of maturity, type of asset, and geographic location of the investment.


All my best as you manage the tension between risk and return!



About the Author:

Ted Greene is part of the Investor Relations team at Spartan Investment Group. Spartan syndicates self-storage assets for investment. Ted has 24 years of experience in the financial services industry as an investment advisor and Chief Compliance Officer. Ted can be found on LinkedIn at or

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Top 9 Takeaways from CBRE U.S. Lending Figures Report

Top 9 Takeaways from CBRE’s Latest Lending Figures Report

Each quarter, the commercial real estate institution CBRE releases its U.S. Lending Figures report, which analyzes mortgage debt in commercial real estate.

Here are my top 9 takeaways from CBRE’s Q1 2021 lending report:


1. Lending momentum is down YOY.

The CBRE lending momentum index tracks loans originated or brokered by CBRE capital markets based on a 100 baseline from 2005. The Q1 ending lending momentum was down 6% YOY. However, it is up by 16.7% compared to December 2020 and achieved an all-time high in January 2021.


2. Most non-agency loans were originated by banks and alternative lenders.

39.2% were originated by banks (up YOY), 30.6% by alternative lenders (credit companies, debt funds, pension funds — up slightly YOY), 19.2% by life companies (down YOY), and 11% by CMBS lenders (down YOY).


3. Treasury yield rate increased.

The Q1 ending 10-year treasury rate is 66 bps higher compared to Q4 2020.


4. Rising equity prices, lower volatility, and smaller corporate bond rates.

The S&P 500 closed at a new high of 4232.6 in early May, which is a 14.4% YOY increase. Volatility (measured by the VIX index) has decreased YOY and since Q4 2020. The BBB corporate index spread was down 14 bps between the end of April 2021 and the end of December 2020 (130 bps to 116 bps), which peaked at 488 bps in March 2020.


5. Commercial mortgage loan spread to U.S. Treasury tightened.

Overall spread for commercial loans was down 31 bps from Q4 2020 to Q1 2021 (275 bps to 244 bps) but is up 23 bps YOY. The spread on multifamily loans is up 7 bps in Q1 2021 and up 24 YOY.


6. Mortgage rate distribution shifted higher.

Nearly 70% of mortgages had a coupon rate above 3% in Q1 2021 compared to 59% in Q4 2020.


7. Underwriting assumption changes.

DSCR fell slightly (1.57 Q4 to 1.52 Q1). The amortization rate (a measure of the average percentage of the original loan balance that pays down over the loan term) increased (18.6% Q4 to 26.8% Q1). Percentage of full-term interest-only loans decreased (34.3% in Q4 to 17.4% in Q1). Interest rates increased (3.08% Q4 to 3.34% Q1). Debt yield decreased (8.89% in Q4 to 8.75% Q1). Cap rates were largely unchanged.


8. Loan-to-values were largely unchanged.

Commercial loan LTVs were up 1% from Q4 and 10 bps lower YOY, indicating that leverage has recovered to pre-pandemic levels.


9. Mortgage volume is up.

Agency volume was $35.5 billion in Q1 2021, up from $24.2 billion in Q1 2020. CBRE’s agency pricing index (reflects the average agency fixed-mortgage rates for closed permanent loans with a seven-to-10-year term) increased by 46 bps in Q1 2021 to 3.18%, which is down 55 bps YOY.


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Assumable Commercial Real Estate Loan – Potential Pros and Cons

When considering your debt options for a commercial real estate deal, you have two main options:

  1. Secure new debt
  2. Assume the existing debt

If the owner pre-negotiated an assumption right into their loan documents, once they go to sell the property, potential buyers have the option to assume the existing the loan. That is, the existing loan is transferred from the current borrower to the new borrower at the same terms.

When you are analyzing an on-market deal, there is typically a section in the offering memorandum that states whether the loan is assumable. When you are analyzing an off-market deal, you will need to ask the owner if the current debt is assumable.

There aren’t absolute pros and cons of an assumable loan because the benefits and drawbacks vary based on the buyer’s financials and experience, the terms of the existing loan, the type of existing loan, and the market conditions. So, instead. Let’s focus on the potential pros and cons of assuming a loan.

Potential Pros of an Assumable Commercial Real Estate Loan

Time Savings: Loan assumptions can be approved in as little as 30 days (maybe even sooner) whereas a new loan may take a few months to complete due to the extra documentation required.

Money Savings: Because the loan assumption process may be shorter and requires less documentation, the costs incurred via lender fees are typically lower than the costs incurred from securing a new loan.

Better Terms: The buyer has the opportunity to receive better loan terms – a lower interest rate, fixed interest rate, longer term, etc. – than they would of if they secured a new loan.

Lower Down Payment: When a buyer assumes a loan, the down payment is equal to the difference between the amount owed by the debt and the sales price (i.e., the equity). If the owner doesn’t have a lot of equity in the deal, the down payment may be lower than the down payment on a new loan.

More Attractive Deal: Because of the aforementioned pros of the assumable loan, a seller may attract more buyers as well as sell the property faster.

Potential Cons of an Assumable Commercial Real Estate Loan

Longer Approval Process: if the current loan is overly complicated, the loan approval process can take longer than the process of securing a new loan.

One Lender: The buyer who is assuming the loan is forced to work with the lender that holds the existing debt.

Higher Down Payment: If the owner has a lot of equity in the deal, the down payment may be higher than the down payment of a new loan.

Worse Terms: if the terms of the existing loan aren’t as favorable as the current market terms, the debt terms could be worse than the terms of a new loan.

Won’t Qualify for the Assumption: Lenders have broad discretion when qualifying a buyer for an assumable loan. For example, they will want the buyer’s financials and experience to be similar to those of the current owner. So, the buyer may not qualify for the assumption.

Because of these potential cons, it is important to have financing contingencies in place in your contract and have a few lenders on back-up in case you don’t qualify for the assumption.





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Interest-Only Commercial Real Estate Loans – Potential Pros and Cons

As the name implies, when you secure an interest-only commercial real estate loan, the monthly debt service is equal to the interest on the principal loan balance. For example, on a $10 million loan amortized over 30 years with a 5% interest rate, the interest-only payment is $41,666.67. Whereas the debt service on a non-interest-only loan would be $54,486.03 (principal plus interest).

Generally, when securing a bridge loan, the debt service will automatically be interest-only. However, when securing an agency loan from Fannie Mae or Freddie Mac, you may have the option to receive one or more years of interest-only payments (even up to the full hold period for the most experienced borrowers).

When securing an agency loan and deciding whether to pay interest-only or pay principal plus interest from day one, here are some things to think about:

Potential Benefits of Interest-Only Payments

There are two main potential benefits to securing an interest-only period for a commercial real estate loan.

First is the higher cash flow during the interest-only period. When implementing a value-add business plan, you are forcing appreciation by improving the physical property and the operations to increase the net operating income. Typically, this process takes at least a year to complete. So, during this value-add period, the net operating income (and therefore, the cash flow) is lower. When you secure an interest-only loan, the lowered net operating income may be offset by the reduced debt service. As a result, you can use the extra cash flow to either reinvest in the property or, more likely, distribute returns to your investors. In fact, one of the best ways to achieve the preferred return during the renovation period is to secure an interest-only loan.

The second potential benefit of the interest-only loan is that you and your investors can receive cash sooner rather than later. The additional cash flow received during the interest-only period helps increase the IRR compared to receiving that cash at sale. Back to the $10 million loan example in the introduction, the difference between the interest-only payment and the principal plus interest payment is $12,819.36. Technically, all payments above the interest amount reduces the loan balance. So, rather than receiving that additional payment during the business plan, you would receive it at sale. Due to the time value of money, that $12,819.36 is worth more when received during the hold period than it would be worth in the future, say once the property is sold in 5 years. In addition, in the event of a massive reduction in property value, you and your investors will be much happier if you were able to receive those additional cash payments, especially if the value of the property is lower than the loan balance that would have otherwise been paid down.

Potential Drawbacks of Interest-Only Payments

There are three potential drawbacks to securing an interest-only loan.

First is that there is no principal paydown. As I mentioned above, this is also a potential benefit due to the time value of money. However, if the plan is to refinance or secure a supplemental loan after implementing the value-add business plan, the proceeds will be lower due to the fact that no principal was paid down during that period. Or, if the market cap rate increases and the value of the property decreases, you may become “underwater” on the mortgage and have to actually pay to sell the asset.

Secondly, once the interest-only period expires, the debt service increases. If you are not implementing a value-add business plan, unless the rental rates increase naturally, your cash flow will take a major hit once your debt service increases. If you are implementing a value-add business plan, you will need to increase the cash flow by an amount that is equal to or greater than the increase in debt service once the interest-only period expires. If you are unable to increase the cash flow as quickly or as high as projected, you may not be able to achieve your projected returns once the interest-only period expires.

Lastly, you may convince yourself to do a bad deal because of the lowered debt service during the interest-only period. For example, you may underwrite standard principal plus interest debt and the deal doesn’t meet your return projections. But if you underwrite three years of interest-only, the deal does meet your return projections. This isn’t a problem as long as you are conservatively underwriting the deal. Since you know the deal doesn’t make sense with a standard principal plus interest loan at the current net operating income, you need to be confident in your ability to increase that net operating income amount before the interest-only period expires.


Overall, interest-only loans are best when you are implementing a value-add business plan. As long as you are conservatively underwriting your deals and are confident in your rent premium assumptions, interest-only loans are a great way to distribute the preferred return to your investors while you are repositioning the asset.

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What is The Ideal Apartment Loan – Fixed Rate or Floating Rate?

The debt service on your deal is generally the highest ongoing expenses when investing in apartments. It is always important to consult with a lender or mortgage broker prior to submitting an offer so that you understand the loan programs your deal qualifies for. However, you still want to know the benefits and drawbacks of the various types of debt so that you are setting yourself and your investors up for success.

One important aspect of the debt is the type of interest rate you secure. The two main types of interest rates offered when securing an apartment loan are fixed interest rate and floating interest rates.

Here is a rundown of the differences between fixed rate and floating rate apartment loans so that you can select the ideal one for your next deal:


Fixed Rate Loans

The interest rate on fixed rate loans is locked in from day one and will not change during the life of the loan. For example, a 10-year Fannie Mae loan with a 5.5% interest rate.

The interest rate on fixed rate loans are typically tied to the US Treasury Rates. Click here for the most up-to-date Treasury rates. Generally, the fixed interest rate will be higher than the floating interest rate, all other things being equal.

Since lenders base their fixed interest rate loans on longer-term Treasuries, they have the expectation that the loan will be in place and that they will collect interest payments for a longer period of time. That said, the prepayment penalty for selling the property or refinancing a fixed interest rate loan is higher compared to floating interest rate loans.


Floating Rate Loans

The interest rate on a floating rate (also referred to as adjustable rate, ARM) loan may go up or down during the life of the loan. For example, a 10-year floating rate loan starting at 4.5%.

Most floating rate loan programs offer the borrower the ability to purchase a cap on the interest rate. That is, in return for an upfront payment, the borrower can guarantee that their interest rate won’t exceed a specified threshold.

Additionally, some loan programs offered start with a floating rate and transition to a fixed rate loan. For example, Freddie Mac has a Two-Plus-Seven Float-to-Fixed Loan program, where the interest rate is floating during the first two years and is fixed year 3 to 7. Plus, with most floating-to-fixed interest rate loans, the borrower has the ability to purchase a locked-in fixed interest rate at closing, rather than having the fixed interest rate be the interest rate at the end of the floating period.

The interest rate on floating rate loans are typically tied to the LIBOR. The LIBOR rate used will determine how often the interest rate will float, or adjust. For example, Freddie Mac bases the interest rate for their floating rate loan on the 1-month LIBOR index. So, the interest rate adjusts each month.

Click here for the most up-to-date LIBOR rates.

Since the floating interest rate is tied to a shorter-term security compared to the fixed interest rate, the borrower has more flexibility to sell or refinance without facing a large prepayment penalty.


Fixed Rate of Floating Rate?

The decision to pursue a fixed rate or a floating rate loan is based on your business plan. If the plan is to drastically improve the asset over time, a floating rate loan might make more sense because of the flexibility to sell or refinance without the large prepayment penalty.

If the plan is to not improve the asset or to make minor improvements, a fixed rate loan might make more sense because you likely won’t need to refinance or sell quickly. Plus, if you have the option to secure a supplemental loan, you can pull out some equity created without facing a large prepayment penalty.

Also, the interest rate on the floating rate loan are generally lower at closing compared to the interest rate on a fixed rate loan. If interest rates fall, you will benefit from an even lower interest rate with the floating rate loan, whereas you won’t benefit from the reduction in interest rates with the fixed rate loan. However, if interest rates rise, the fixed rate loan is beneficial because your interest rate won’t change, whereas the interest rate on the floating rate loan will increase. Although, you will likely have the option to purchase a cap on the interest rate on the floating rate loan.

Creating your pro-forma is easier with a fixed rate loan, because your monthly debt service remains the same during the entire business plan. With a floating rate loan, you may only know what your debt service will be for as little as one month. But again, you will likely be able to purchase a cap on the interest rate of the floating rate loan, so at the very least you will know the maximum debt service you’d have to pay.

Here is a great resource that lists out the current interest rates for the most popular apartment loan programs.


Are you an accredited investor who is interested in learning more about passively investing in apartment communities? Click here for the only comprehensive resource for passive apartment investors.

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Does Your Apartment Deal Qualify For Agency Debt?

One of the most sought after loan programs by apartment investors and apartment syndicators alike is agency debt. That is, a loan secured from either Fannie Mae or Freddie Mac.

Fannie Mae and Freddie Mac loan programs generally have better, more competitive terms (i.e., interest rates, loan length, interest-only payments, etc.) compared to other common loan programs offered through your traditional banks or bridge loan lenders.

If you want to secure Fannie Mae or Freddie Mac debt, you not only need to find a deal that meets their loan requirements, but you as the borrower will also need to meet their experience requirements.

Here are the five questions you need to answer, which will determine whether you and your deal will qualify for Fannie Mae or Freddie Mac agency debt:


1. What is The Purchase Price?

The price at which you’re purchasing the asset will determine if your deal exceeds Fannie Mae’s or Freddie Mac’s minimum loan amounts and is below the maximum loan amounts.

If you are pursuing a non-rehab loan, the minimum loan amount is $750,000. To determine the minimum purchase price, you need to divided the minimum loan amount by the maximum loan-to-value (LTV) offered, which is 80%. Therefore, if the purchase price is less than $937,500 (i.e., a loan less than $750,000), the deal will not qualify for Fannie Mae or Freddie Mac debt. If the purchase price is greater than $937,500, the deal may potentially qualify for agency debt – assuming the other requirements outlined in the next sections are met.

The agencies also have a maximum amount of money they are willing to loan. Freddie Mac has a $100 million cap on the amount of money they will loan for a non-rehab project, which means the purchase price must be below $125 million. Whereas Fannie Mae is more flexible with $100 million plus loans.

If you are pursuing a rehab loan, the minimum loan amount is $10,000,000 with no maximum and the maximum LTC is 80% for Fannie Mae. Therefore, the purchase price plus total project costs must exceed $12,500,000 in order to potential qualify for a Fannie Mae rehab loan. Freddie Mac is more flexible with their rehab loans and base the loan amount on the LTC (up to 85%) and debt service coverage ratio (DSCR).


2. What is the DSCR?

The debt service coverage ratio (DSCR) is calculated by dividing the debt service by the current net operating income. If you know the DSCR and current net operating income, you can calculate the debt service (debt service = current net operating income / DSCR). Both Fannie Mae and Freddie Mac have minimum debt service coverage ratio requirements, which essentially mean that the deal needs to exceed a certain net operating income level to qualify for agency debt. If the net operating income is too low, you will likely need to put down a lot of money to qualify, which will likely reduce the returns to the point where the deal won’t make sense.

If you are pursuing a non-rehab loan, the minimum DSCR for Fannie Mae is 1.25. That is, the current net operating income must be at least 25% greater than the debt service. The minimum DSCR for Freddie Mac varies based on the market:

  • Top markets: 1.20 DSCR
  • Standard markets: 1.25 DSCR
  • Small markets: 1.30 DSCR
  • Very small markets: 1.40 DSCR

If you are pursuing a rehab loan, the minimum DSCR is 1.25 for Fannie Mae and 1.10 for Freddie Mac.


3. What are The Occupancy Rates?

Both Fannie Mae and Freddie Mac have physical and economic occupancy rate requirements for their non-rehab loan programs.

Physical occupancy is the rate of occupied units and economic occupancy is the rate of paying residents. If the physical occupancy rate is less than 85% and/or the economic occupancy rate is less than 80% ninety days before the closing date, the deal will not qualify for agency debt.

However, Fannie Mae and Freddie Mac do not take occupancy levels into account for their rehab loan programs.


4. What are The Renovation Costs?

In order to qualify for a renovation loan through Fannie Mae and Freddie Mac, the per unit cost must exceed their minimum amounts and must not exceed their maximum amounts.

If the per unit cost to rehab the apartment deal is less than $10,000 or greater than $60,000 per unit, which includes interior and exterior capital expenditure projects, the deal will not qualify for a rehab agency loan.


5. What is Your Experience?

In order to qualify for Fannie Mae or Freddie Mac debt, you or someone else signing on the loan must have previous multifamily experience.

If you are pursuing a non-rehab loan, you must have a strong track record in the multifamily industry (although, some exceptions are made if you are a local owner). Additionally, the person or people signing on the loan must have a net worth equal to the loan amount and liquidity equal to 9 months of debt service.

If you are pursuing a rehab loan, you must have a strong track record in multifamily rehabilitation.


Above at the minimum requirements to qualify for Fannie Mae or Freddie Mac debt. However, is you and the deal meet all of the above requirements, it doesn’t mean you will qualify for all agency loan programs. The purpose of this blog post is to give you an idea of whether you will qualify for one of the Fannie Mae or Freddie Mac loan programs. If you and the deal meet all of the above requirements, the next step is to contact a commercial mortgage broker to discuss your options.


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Hud Loan Programs for Apartment Syndicators: Everything You Need to Know

Hud Loan Programs for Apartment Syndicators: Everything You Need to Know

Let’s talk about one of the top loan program providers that apartment syndicators use on their deals: Hud.

Hud can be a great option for apartment deals. We’re going to cover each of their common loan programs, including their permanent, refinancing, and supplemental loans.

Loan 1: 223(f)

The first Hud loan, which is the permanent loan, would be the 223(f). This is very similar to agency loans, except for one major difference: processing time. Plus, the loan terms are actually a little bit longer. So for the 223(f), the loan term is going to be lesser of either 35 years or 75% of the remaining economic life. 

So if the property’s economic life is greater than 35 years, then your loan term is actually going to be 35 years. It’ll be fully amortized over that time period. Whatever the loan term is what the amortization rate will be. If you’re dealing with a smaller apartment community under the $1 million purchase price, then this is not going to be the loan for you.

In regards to the LTVs, for the loan-to-values, they will lend up to 83.3% for a market rate property, and they will also lend up to 87% for affordable. So that’s another distinction of the housing and urban development loans, which is they are also used for affordable housing. There will be an occupancy requirement, which is normal for most of these loans. 

The interest rate will be fixed for this loan, and then you will have the ability to include some repair costs by using this loan program. For the 223(f) loan, you can include up to 15% of the value of the property in repair costs or $6500 per unit. If you’re not necessarily doing a minor renovation, but if you’re spending about $6500 per unit overall, then you can include those in the loan.

The pros of this loan are that they have the highest LTV. You can get a loan where you don’t have to put down 20%; you can actually put down less than 20%. It also eliminates the refinance as well as the interest rate risk, because it is a fixed rate loan, and the term can be up to 35 years in length. You won’t have to worry about refinancing or the interest rate going up if something were to happen in the market. 

These loans are non-recourse as well as assumable, which helps with the exit strategy. There’s also no defined financial capability requirements, no geographic restrictions, and no minimum population. There’s essentially no limitation on them giving you a loan for a deal if the market doesn’t have a lot of people living in it or the income is very low. 

There are also some cons involved when considering a Hud loan. The processing time is much longer than some. The time for a contract to close is at a minimum of 120 days to six or nine months is actually common. Other loan providers have processing times between 60 and 90 days. Hud loans take a little bit longer to process. They also come with higher fees, mortgage insurance premiums, and annual operating statement audits.

Loan 2: 221(d)(4)

The next Hud loan is 221(d)(4). These are for properties that you either want to build or substantially renovate. 

Similar to the 223(f) loan, these loans do have very long terms. The length of the loan will be however long the construction period is, plus an additional 40 years. That is fully amortized. 

This isn’t the loan for smaller deals, because the minimum loan size is going to be $5 million. So if you have a deal that you want to renovate and has got a $1 million purchase price, you’re going to have to look at some other options. 

Similarly, this is for market-rate properties as well as affordable properties, with the same LTVs of 83.3% and 87% respectively. These loans are also assumable and non-recourse as well as fixed interest with interest-only payments during the construction period.

The CapEx requirements for this loan are quite different than the 223(f). For the 223(f), it was up to 15% or up to $6500 per unit, whereas for the 221(d)(4) loan actually needs to be greater than 15% of the property value or greater than $6500 per unit. 

The 221(d)(4) pros and cons are pretty similar to the 223(f) pros and cons. There’s the elimination of the refinance and interest rate risk, because of that fixed rate in a term of up to 40 years. They’re also higher leveraged than your traditional sources. Those longer processing time and closing times can be a pain. There’s going to be higher fees, and you also have those annual operating audits and inspections.

Loan 3: 223(a)(7)

Hud also offers refinance loans as well as supplemental loans for their loan programs. Their refinance loan is called the 223(a)(7).

If you’ve secured the 223(f) loan or you’ve secured a 221(d)(4) loan, you’re able to secure this refinance loan, and it has to be one of those two. You can’t go from a private bridge loan to this refinance loan– that’s not how it works.

The loan term for the refinance loan is up to 12 years beyond the remaining term, but not to exceed the term. If your initial term was 40 years and you refinanced at 30 years, then this refinance loan will only be 10 years, because it can’t be greater than 40 years. 

It will be either the lesser of the original principal amount from your first loan, or a debt service coverage ratio of 1.11 or 100% of the eligible transaction costs. These loans are also fully amortized. The occupancy requirements are going to be the same as the existing terms for the previous loan. These are also going to be assumable and non-recourse with that fixed interest rate.

Loan 4: 241(a)

Hud also has a supplemental loan program available, which is the 241(a). This is only probable if you’ve secured the 221(d)(4) or 223(f). 

The loan term is coterminous with the first loan. Whenever you acquire it, it’s just going to be the length of the remaining loan. You’re essentially just adding $1 million or $5 million to your existing loan. 

Your loan size can be up to 90% of the cost of the property, so essentially a 90% LTV, because you need to have at least 10% of equity in the property at all times. It’s going to be fully amortized. 

They’re also going to base the loan size on the debt service coverage ratio. Because of this, it needs to be 1.45. That’s a ratio of the net operating income to the debt service. Then, the minimum occupancy requirements are going to be the same as whatever the terms are for your existing loan. Like all the loans, they’re assumable, they are non-recourse, and the interest rate is fixed.

And that’s it for Hud loans! What do you think about taking out loans through Hud for real estate purposes? Tell us what you think in the comments below!

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Everything You Need to Know About Prepayment Penalties on Multifamily Loans

Last Updated: 6-5-19


The prepayment penalty is a clause specified in a mortgage contract stating that a financial penalty will be assessed against a borrower if they significantly pay down or pay off the mortgage before a specified period of time.

“What you’re saying is that the lender will actually charge me a fee to give them their money back?”

As counterintuitive as that sounds, that is correct.

When a lender is underwriting a loan, they consider the fact that they will make money off of the interest payments. If you pay off a large portion of or the entire loan balance, the lender will no longer receive those interest payments. Therefore, the prepayment penalty protects the lender against the financial loss of interest income that would have otherwise been paid over time.

Typically, the prepayment penalty is incurred if the borrower significantly pays down or entirely pays off the loan balance via a refinance or sale within 1 to 3 years, and sometimes up to 5 years.

There are three main categories of prepayment penalties: (1) hard/soft prepayment penalties, (2) yield maintenance, and (3) defeasance.


(1) Hard and Soft Prepayment Penalties

The first category of prepayment penalties is referred to as hard and soft prepayments. A soft prepayment penalty allows a borrower to sell their home at any time without paying a fee. But, a fee is incurred if the borrower decides to refinance. A hard prepayment penalty does not allow the borrower to sell or refinance without paying a fee.

Both hard and soft prepayment penalties are either a percentage of the remaining loan balance (generally between 1% and 3%), a fixed amount, or a certain number of months’ worth of interest. For the latter, an example would be 80% of six months’ worth of interest.


(2) Yield Maintenance

The second category of prepayment penalties is yield maintenance. Yield maintenance is a prepayment penalty that allows the lender to attain the same yield as if the borrower made all scheduled interest payments up until the maturity date of the loan.

Remember, when a lender provides a loan, they do so with the expectation of receiving interest on the loan amount. If the borrow repays the loan amount earlier than expected, a yield maintenance premium can be charged, which allows the lender to earn their original yield.

The purpose of the yield maintenance prepayment penalty is to protect the lender against falling interest rates.

The yield maintenance premium is the difference between the amount of money the lender would have made from interest payments on the loan and how much money they would make if they were to “reinvest” the remaining loan balance. The most common investment vehicle used to calculate the yield maintenance is a US Treasury bond. For example, if the borrower repays the entire loan balance 5 years early, the yield maintenance would be the difference between 5 years’ worth of interest payments and the interest earned from a 5-year US Treasury bond.

Click here for the US Treasury Yield Curve rates (1, 2, 3, and 6 month and 1, 2, 3, 5, 7, 10, 20, and 30 year) set by the Federal Reserve Bank of New York at or near 3:30pm each trading day.


(3) Defeasance

The third category of prepayment penalties is called defeasance. Rather than getting charged a prepayment fee, the defeasance option allows the borrower to exchange another cash-flowing asset for the original collateral on the loan. Defeasance only applies to commercial real estate loans, while the other two prepayment categories apply to all mortgage loans.

The new collateral, which is normally a Treasury security, is usually much less risky than the original commercial real estate investment, so the lender is far better off because they receive the same cash flow they would have received from the interest payments on the loan and in return receive a much better risk-adjusted investment.


Which Prepayment Clause Should You Choose?

Each prepayment category has its pros and cons to both to borrower and the lender. The best option depends on your business plan and the investors’ expectations on future interest rates.

The benefit of having a prepayment penalty clause for the borrower is that they will receive a lower interest rate and lower closing costs compared to the same loan without a prepayment penalty. As long as your projected business plan is longer than the prepayment period, you benefit from the lower upfront and ongoing costs without having to worry about paying a prepayment fee. It gets a little trickier if you’re projected business plan is shorter than the prepayment period.

The hard and soft prepayment penalties is based on the timing of the refinance or sale, which make it easier to calculate upfront. If you secure a 5 years loan with a prepayment penalty during years 1 to 3, you should be able to calculate the prepayment penalty if you plan is to sell during year 2 – the fee is, for example, 1% of the remaining loan balance or 80% of six months of interest).

The other two prepayment categories are dependent on the interest rates at the time of sale or refinance, which requires some speculation on the part of the investor.

Generally, the yield maintenance premium and defeasance fees are based on the US Treasury rate, and the US Treasury rate is based on the market interest rate. As interest rates go up, the costs to invest in US Treasury rates go down, and vice versa.

If the borrower has a yield maintenance prepayment clause and the current interest rate is higher than the loan interest rate, the yield maintenance premium usually decreases to zero. When interest rate rise, US Treasury bonds are cheaper, so the difference between the remaining interest rates and the cash flow from buying US Treasury bonds or providing another mortgage loan is zero or a net gain to the lender. However, lenders will typically add a clause that if the yield maintenance is zero, a 1% to 3% prepayment fee is required. For example, the prepayment penalty may be the greater of the yield maintenance or 1% of the remaining loan balance. If an investor fees that interest rates will rise, selecting yield maintenance can be the cheaper option compared to a hard or soft prepayment penalty fees or defeasance payments.

The defeasance fee is also based on the US Treasury rate. However, unlike yield maintenance, the borrow can technically make money with defeasance. Again, if interest rates on loans rise to a rate greater than the loan’s interest rate, US Treasury bonds lose value and become cheaper. The borrower is then able to purchase the required bonds for less than what is required to prepay the loan, resulting in additional cash flow. However, if interest rates fall, US Treasury bonds gain in value and the borrower has to pay an amount greater than the loan balance at prepayment. Defeasance is good if the investor thinks interest rates will rise or plans on selling their multifamily property early and are worried about the potential increase in mortgage payments with a floating rate loan. However, the defeasance process is quite complicated. The investor will likely need to hire a defeasance consultant, which increases the associated costs.



Overall, prepayment penalties protect lenders from falling interest rates and allow borrowers to negotiate loans with lower interest rates and lower closing costs.

With the hard and soft prepayment clause, an investor can accurately predict the prepayment fee as long as they have a good idea about when they will sell or refinance. However, these fees will likely be the highest of the three.

Yield maintenance is less predictable than the hard and soft prepayment costs. However, if interest rates rise, the fee will be less than the hard and soft prepayment fees and maybe even the defeasance fee. But the investor will always have to pay a fee of some amount.

Defeasance is also less predictable than the hard and soft prepayment costs. However, defeasance is the only category of prepayment penalties that can result in a net gain to the borrower, depending on how high interest rates rise. There are also added costs with defeasance, because it is necessary to hire a consultant to structure the defeasance portfolio and send ongoing payments to the lender.


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How to Secure a Supplemental Multifamily Loan

A supplemental loan is a type of loan that is subordinate to the senior indebtedness and is secured at least 12 months after the origination of the first agency loan or the most recent supplemental. In other words, a supplemental loan is additional funding that is available 12 months after closing on an apartment deal.

A supplemental loan is not the same as a refinance. The supplemental loan is a second loan secured in addition to your existing loan while a refinance is the process of replacing your existing loan with an entirely new loan.

The benefits of securing a supplemental loan compared to a refinance are the lower cost, certainty of execution, faster processing time, and ability to obtain multiple supplemental loans each year.

In apartment syndication, the supplemental loan is typically utilized to return a portion of the limited partners’ initial equity investment without refinancing into a new loan or selling the property.

A supplemental loan must be secured from the same debt provider as the original loan. If the original loan was provided by Fannie Mae, the supplemental loan must come from Fannie Mae, and the same applies to Freddie Mac.


Supplemental Loan Terms

Here is an overview of the general terms for the Fannie Mae and Freddie Mac supplemental loans:

Fannie Mae Freddie Mac
Loan term 5-30 years 5-30 years
Loan size Minimum $750,000 Minimum $1 million
Amortization Up to 30 years Up to 30 years
Interest rate 100 to 125 bps above standard pricing 100 to 125 bps above standard pricing
LTV Up to 75% Up to 80%
DSCR Minimum 1.30 (1st and supp. combined) Minimum 1.25 (1st and supp. combined)
Recourse Non-recourse w/ standard carveouts Non-recourse w/ standard carveouts
Timing 45 to 60 days from application 45 to 60 days from application
Costs -$10,000 application fee
-1% of loan amount origination fee
-$8,000 to $12,000 legal fees
-$15,000 lender application fee
-Greater of $2,000 or 0.1% of loan amount Freddie Mac application fee
-1% of loan amount origination fee
-$8,000 to $12,000 legal fees


How to Secure a Supplemental Loan?

If securing a supplemental loan is a part of the terms on your initial loan, you can request one any time after your original loan has been seasoned for 12 months.

Reach out to the mortgage broker or the lender who provided the original loan and ask them what they need in order to size out a supplemental loan. Typically, they will request:

Then, they will perform an appraisal and a physical needs assessment (which is essentially a property conditional assessment) in order to determine the size of the supplemental loan.

You also want to ask your mortgage broker or lender how many supplemental loans are permitted, because you may be able to get more than one (as long as you wait 12 months between loans).


Example Supplemental Loan

If you plan on securing a supplemental loan for an apartment deal, you must include that assumption in your initial underwriting. Once the loan is secured, your debt service will increase, which will reduce the overall cash flow.

To estimate the maximum supplemental loan and debt service, you need to know the following:

  • Supplemental loan year
  • Projected net operating income at supplemental
  • Projected capitalization rate at supplemental
  • Balance of first loan (plus other supplementals) at supplemental
  • Supplemental loan length
  • Supplemental loan amortization schedule
  • Supplemental interest rate
  • Supplemental max loan-to-value (LTV)
  • Closing costs

For example, the initial Fannie Mae loan amount is $22,000,000 with three years of interest-only payments at 4.94%. The plan is to take out a supplemental loan at the end of year two, so the loan balance remains at $22,000,000 (since only the interest was paid for the first three years). After inputting all of the underwriting assumptions, the projected net operating income at the end of year two is $1,828,101. The in-place capitalization rate (i.e. the rate based on the purchase price and net operating income at purchase) is 5.5%. To be conservative, we assume a cap rate of 5.75% at year 2. The property with a net operating income of $1,828,101 and a capitalization rate of 6% is valued at $31,793,061.

Since the initial loan was secured from Fannie Mae loan, the maximum LTV is 75%. In other words, Fannie Mae will fund a maximum of 75% of the property value, which, for our example, is $23,844,796 at the end of year two. Since the loan balance on the initial loan is $22,000,000 and assuming $220,000 in closing costs, the maximum supplemental loan available is $1,624,796.

To determine the additional debt service from the supplemental loan, you need to know the expected loan terms. Based on the Fannie Mae supplemental loan terms, we can expect a 30-year amortized, 5-year loan at 5.04% interest (4.94% + 100 bps). Apply these loan terms to a $1,624,796 loan and the annual debt service of $106,178.


If the plan is to refinance the property, the process to calculate the new loan amount is similar to that of calculating the maximum supplemental loan. A smart underwriter will create two scenarios, one in which a supplemental loan is secured and one in which the property is refinanced, and compare the return projections and risk levels of each.


Are you a newbie or a seasoned investor who wants to take their real estate investing to the next level? The 10-Week Apartment Syndication Mastery Program is for you. Joe Fairless and Trevor McGregor are ready to pull back the curtain to show you how to get into the game of apartment syndication. Click here to learn how to get started today.



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6 Ways to Spot a Scam Artist Lender


As you start growing your real estate business, you will likely get to the point where you will need to find more money to fund your deals. Even if you started with a lot of money, leveraging OPM (other people’s money) decreases your risk and offers the chance of an infinite return. So, regardless of your financial starting position or your real estate niche, everyone should have the capability and understanding of how to raise capital.


When most investors reach the point where they need to find more money, they get nervous. They think accessing capital will be difficult. However, with a few quick Google searches, you’ll find a flood of people who need to deploy their capital quickly.


That’s great, right? Well, not exactly.


Ross Hamilton, who is the CEO of Connected Investors, an aggregator of crowdfunding portals with 250,000 investors, said “we work closely with all of the real hard and private money lenders around this great country, and the number one complaint and the biggest competitor of lenders is not other lenders. It’s scammers.”


So, with a plethora of scam artist lenders, how do we distinguish between the real and the fake? In our recent conversation, Ross explained how to screen lenders by looking for the six red flags of a scam artist lender.


Related: How to Qualify for a Commercial Real Estate Loan


What is a scam artist lender?


Before outlining the six red flags, let’s define a scam artist lender. Ross said that a scam artist lender is “going to be people who are actually trying to steal your money, and other people who are just completely and totally wasting your time.” So, a scam artist is the Zimbabwe King that emails you asking for your personal information so they can send you millions of dollars, a newbie lender that doesn’t know what they’re doing, and everything in-between.


When screening a new lender, what are the red flags to look out for?


#1 – Do they want you to wire the down payment?


“If a lender ever asks you to wire them your down payment money, run,” Ross said. Typically, down payment transfers are handled by your attorney, which the lender should know. Therefore, if they ask you to personally wire them money, that is a huge red flag.


#2 – Do they ask for your social security number or other personal information?


Ross said, “Giving away your social security number or any of that information before you’ve vetted a lender” should be avoided and should raise your alarm. This includes bank account information as well. Provide this information and risk having your bank account emptied or your identity stolen, both of which Ross has experienced. If these are the first things they ask for, consider working with another lender.


#3 – Do they have a business email address?


“Using a Gmail [email] address [is a] red flag. This person’s not really in business,” Ross said. This is a quick red flag to spot. If the lender doesn’t have a business email address, that’s a sign that you’re potentially dealing with a scam artist.


#4 – How well is their English?


Ross said another red flag is if “their English isn’t very proper. You can hear the accent come across in the e-mail correspondence.” However, that doesn’t mean that foreigners are the only scam artists. “The people who will waste your time are inside the U.S., the people who will steal your money are typically outside the U.S., because it’s tough to track those people down.”


If improper English is the only red flag, then you are likely in the clear. But if there are other red flags as well, like a Gmail email address and they are asking for your social security number, they may be a scam artist.


#5 – Do they have a website?


“Make sure they have a website. A lot of these lenders have very bad, fake websites (they’re easy to see through) or they just don’t even have a website,” Ross said. This is an obvious red flag that is applicable to any potential business partner. If someone doesn’t have a website in this day and age, something fishy is going on.


#6 – Do they have examples of past deals?


If the lender passes the first five red flags, the last test is to ask for referrals.


Ross said, “A big thing you want to do is you want to vet the lender and you want to say ‘Hey, can you give me some examples of recent deals that you’ve funded?’” If they are the type of scam artist that wants to steal your money, you probably won’t hear back. If it is the incompetent scam artist type, they will either disappear, or they will back pedal, both of which will be obvious to spot.


Related: Pay Attention to These Five Loan Components to Maximize Your Apartment Returns




There are a lot of lenders and private money investors looking for deals to fund. However, a portion of them are scam artists.


In order to screen lenders, Ross Hamilton tells us to look for these 6 red flags:


  • Do they want you to wire the down payment?
  • Do they ask for your social security number or other personal information?
  • Do they have a business email address?
  • How well is their English?
  • Do they have a website?
  • Do they have examples of past deals?


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Pay Attention to These Five Loan Components to Maximize Your Apartment Returns

Many beginner apartment syndicator’s main focus is on raising equity or searching for deals, but then they forget about the financing. Once they identify an opportunity, they go with the first bank that offers them a loan.


In reality, the type of financing secured for an apartment is just as important as raising equity or finding the right deal.

Large commercial real estate loans are not the same as the cookie-cutter residential loans. There are a multitude of options when it comes to commercial financing. When you are dealing with multimillion dollar commercial apartment loans, the difference between two loans can have a huge impact on the cash flow and sales proceeds.


Steve O’Brien, an investment officer who was responsible for the acquisition of over 20 multifamily assets totaling close to $200 million in the last five years, understands the different components of the loan and how they can affect an investor’s bottom-line. In our recent conversation, he outlined the five financing components an apartment syndicator needs to pay attention to prior to selecting a commercial real estate loan.

1 & 2 – Interest Rate and Loan-to-Value

The two commercial apartment loan components that even the first-time syndicator is aware of are the interest rate and the loan-to-value. “Those are the two most important that everyone focuses on,” Steve said. “It basically determines what your costs are going to be, what is the debt service, and how much money you’re going to need from an equity standpoint based on what amount they’re willing to lend you.”

3 – Recourse

While those first two components are relevant to residential as well as commercial real estate loans, this next component is not – recourse vs. nonrecourse loans. Steve said, “with most banks these days, given the crash, they want recourse. What I mean when I say recourse is that they want you to guarantee some or at least a portion of the loan that you’re getting personally.” However, a lot of lenders will offer nonrecourse loans as well. Steve said, “on our entire portfolio that we’ve done of about $100 million in financing, we have not signed any recourse, meaning that if the deals were to go bad, the most the lender could do is come after you for the property itself, so you can technically lose your equity in the deal.”


Of all the commercial apartment loan components, recourse is the most important because it can come back to bite you big-time. In fact, this is one of the things that happened with the real estate crash in the late 2000s. “A ton of people put up recourse and all their loans went bad, and it caused bankruptcies and other issues,” Steve explained. “Not all the lenders will do all the math on all the recourse you have. So you may have guaranteed 150% of your assets, and if everybody comes calling them at the same time, that can be a real problem.”
With a nonrecourse loan, you are personally protected as long as you don’t commit fraud or gross negligence (what are referred to as “carve outs”).


Steve said, “In general there are a lot of options for multifamily investing in particular that do not require recourse, and as long as you stay at a reasonable loan-to-value, you can get a nice healthy 75% loan and still remain nonrecourse.” And if you go low enough on the loan-to-value ratio, depending on the lender, you can avoid the bad-bay carve outs too.

4 – Terms

Another component of the commercial real estate loan to pay attention to are the apartment loan terms. “A lot of banks will want to do a 35-month loan, or a 36, or up to five years with extensions,” Steve said. Your ideal loan terms will depend on your business plan. For example, if you plan on a long-term hold, especially with the historically low interest rates, it may make sense to pay a high interest rate and lock in a 15-year commercial apartment loan. If your business plan is to add value and refinance, a three-year bridge loan may be the best option for you.

5 – Prepayment Penalty

A final component of the commercial real estate loan to pay attention to is the prepayment clause. If your loan has a prepayment penalty and you want to sell early, you will have to pay the lender a large fee. Another form of a prepayment penalty that may be triggered at sale is yield maintenance, meaning the bank will make you buy an instrument to pay them back the interest rate that you would have owed them if you completed the loan.

However, Steve said, “ultimately, that’s a decent problem to have because it probably means that you’re doing well, but it just limits your flexibility.”

Best Ever Loan Advice

Steve’s Best Ever advice for how to approach these five components of commercial apartment loans is “You’ve got to pay attention to your goals. Is your goal to buy and improve a property and then flip it? Well, then don’t put long-term debt on it. If your goal is to buy a property and hold it forever, well then you may want to consider not doing a three-year bank loan with two one-year extensions and going to a longer-term lender that will do a balance sheet loan for you, like a life insurance company or an agency (Fannie Mae, Freddie Mac, something like that) in order to lock your returns in for the long-term. Because it’s a nice, warm blanket to have a low interest rate that you know doesn’t mature for 10 years. Unless you want to sell it, and then you’ve got a prepayment penalty. So it’s all very determined based on your goals, and I think that’s what the key is – to set your strategy and your goals for the asset and try and find debt and equity that best mirrors your strategy and goals.”


If you’re looking for additional advice regarding apartment syndication, consider my newest book, The Best Ever Apartment Syndication Book. In it, learn why finding private money investors may sometimes be more effective than taking out excessive commercial real estate loans and how to find those passive investors effectively.

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How to Qualify for a Commercial Real Estate Loan

Ready to make the transition from residential to commercial real estate investing? If so, it’s important to understand the difference between a standard residential mortgage and a commercial real estate loan.


Michael Reinhard, a long-time commercial mortgage broker, wrote the successful book Commercial Mortgages 101: Everything You Need to Know to Create a Winning Loan Request Package. In our recent conversation, he provided a crash course on what lenders look for when qualifying a commercial loan.


The first thing Michael emphasized is “that a commercial real estate loan is an entirely different industry than a residential loan.” Residential loans are provided to an owner-occupied buyer or a one to four-unit investor, whereas a commercial loan is provided to a five-unit or more investor. Michael said, in regards to the residential loan, “Everything you know about and any experience you have with that type of loan – forget about it. Don’t even try to make a comparison. It’s a completely different industry.”


Related: The 4 Multifamily Asset Classes Defined


How does a commercial lender qualify and get approved for a commercial mortgage loan? Here are the five areas the lender looks at.

#1 – Credit Scores

One of the main differences between a residential and commercial real estate loan is the amount of weight the credit score holds. “It’s always good to have a good credit score,” Michael said. “[For] residential mortgages, it’s almost like everything hinges on your credit scores only, and, of course, income. But with commercial real estate loans, credit score is not the top consideration. It’s almost not important.”


However, if your credit score is below 600, it will raise some eyebrows and require further explanation. If it’s below 500, qualifying for a commercial loan will be difficult.

#2 – Net Worth

When applying for a commercial real estate loan, one of the first things a lender will look at is your net worth. Your net worth is the difference between your assets and your liabilities. Lenders want to see a net worth equal to or greater than the loan amount.


For example, Michael said, “If you’re wanting to buy a $1,250,000 apartment building [… ] in an 80% loan to be a million dollar loan, they would like to see your net worth equal to a million or more.”


However, a net worth equal to or greater than the loan isn’t always the rule. For the example above, you could have a net worth of $600,000 or $800,000, but you need to make up for it with something else. For example, if you have a high income, then net worth isn’t as important.

#3 – Liquidity

Liquidity is also really important when applying for a commercial real estate loan. For a $1,250,000 loan, if covering the $250,000 down payment exhausts all your liquid cash, Michael said, “the lenders will look upon that as a little weary because you have no cash left. They don’t like to see someone use up all their cash after a closing and then not have anything for an emergency, such as a $10,000 to $20,000 deductible for an insurance claim.”


The liquidity requirement varies from lender to lender. “The general rule is 10% to 20% of the loan amount,” Michael explained. “If you’re wanting to borrow a million dollars, you have to have at least $100,000 after closing; $150,000 or $200,000 is even better.” Other times lenders may require 6 to 12 months worth of principal and interest payment. If the monthly payment is $10,000, for example, a lender may want to see $120,000 in liquidity.

#4 – Ownership and Management Experience

The commercial real estate loan lender will also want to know about your ownership experience. Michael said, “Owning a duplex or three or four single-family rentals, or maybe 10 or 12 (you could even have 30 of them) – that’s even better if you have a large portfolio of single-family rentals. But if you’ve only had one or two, and maybe a couple of duplexes, that’s not the same as a multifamily because it’s a little bit different animal.”


If you are purchasing “anywhere between 5 and up to maybe 50 units,” Michael said, “they pretty much allow you to self-manage the property because there’s not a lot of third-party management of that size; it’s just too small and they don’t make enough money on it.” Therefore, since you will be self-managing, the lender will want you to have previous management experience. Do you know about leasing? Do you know how to perform credit checks, verify employment, and run a background check?

if you aren’t managing the property yourself, however, ownership experience will be more important than management experience.

#5 – Income

money income Finally, the last area a lender will be asking about is your income, whether you’re self-employed or a W2 employee. If you already own a portfolio of properties and are asking for a commercial real estate loan, they will want to look at your global cash flow, which is how much cash you earn after debt service. If you experience a hardship on one property, they want to make sure you can move cash around to keep all your debt service intact.


Michael said, “There’s really no ratio on [global cash flow]. People ask me about your debt-to-income ratio, [but] they don’t really use that in commercial real estate. They just look at the property’s loan-to-value and debt coverage ratio, meaning how much does the net operating income exceed the monthly principal and interest payment.”


Commercial real estate loans are a completely different animal than residential loans. When applying for a commercial loan, the lender will take the following into account:


  • Credit score
  • Net worth
  • Liquidity
  • Experience
  • Income


Know of any commercial real estate available in the Houston Texas area? Want to share your experience of applying for a commercial real estate loan? Please comment below! And, if you want to learn even more about how to raise capital for apartment syndications, take a moment to read or listen to the related article: 4 Money-Raising Lessons from $265 Million in Apartment Syndications #FollowAlongFriday.


Are you a newbie or a seasoned investor who wants to take their real estate investing to the next level? The 10-Week Apartment Syndication Mastery Program is for you. Joe Fairless and Trevor McGregor are ready to pull back the curtain to show you how to get into the game of apartment syndication. Click here to learn how to get started today.

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Top 3 Questions to Ask When Interviewing a Mortgage Lender

Unless you are paying all cash from your investment properties, you are going to need a mortgage lender on your team. So the question is, how do you find the best lender in your market?

Stephanie Weeks, who has been a mortgage lender for more than 13 years and is in the top 1% of loan officers in the country, finds that the best way to find a lender is simple – ask them pointed questions.

In our recent conversation, she provided the top three questions an investor should ask when interviewing a potential mortgage lender for your team.

The reason why you want to find the best mortgage lender possible is fairly obvious. Stephanie said, “If you’re investing in properties, then that’s your business, that’s part of your livelihood. And time is money. And wasting money on appraisals and inspections is also a waste of money. So, my best advice is that if you’re an investor and you are going to have mortgages when you’re purchasing these properties, team up with the best mortgage lender that you can find. [One] that is going to do everything they need to do to get you to that finish line. So don’t take that decision lightly.”

No two mortgage lenders are that same. To find out who is the best of the best, Stephanie provided the top three questions you should ask a lender before obtaining a mortgage from them and/or hiring them for your team.


Question #1 – When was the last time you read the guideline book?

The first question you should ask is when is the last time you read the guideline book? Stephanie said, “this sounds [like] kind of a joke, but it’s kind of funny and kind of true. For me and my team, we actually review guidelines on almost a daily basis, because on almost a daily basis, guidelines are changing. We actually get the guidelines printed out… We are learning how everything works, how it is done, how it puts us all together.”

When I asked her when was the last time she read the guideline book, her response was “yesterday.”

Stephanie said, “It’s kind of mean for me to say, but I still think it’s funny. You should see their face, or here them stutter, because unfortunately, most loan officers have never picked up a guideline book. That’s frustrating to me.”

This is a great question to determine their level of passion and how seriously they take their profession. While this may not be a deal-breaker, it’s important to know if your lender is staying up-to-date on the updates and changes that are occurring constantly throughout their industry.

Question #2 – What kind of added value do you bring?

Any mortgage lender is capable of providing you with a loan (assuming you meet their requirements), so you want to know what else they have to offer that is unique to them. For example, Stephanie said, “If someone asked me, ‘Okay, Stephanie, what kind of added value do you bring?’ I would say, ‘Well number one, the mortgage industry is broken, and I wanted to change that, so I wrote a book on mortgages. The second thing is I’m going to treat your money like it’s mine. The third thing is I’m going to advise you on your overall situation based on a five-year plan that you tell me that you have, your goals for closing costs, cash out-of-pocket, monthly payment, etc. I am going to shop [around for] insurance for you to get you a good deal.’”

Ask this question to a potential loan officer and see how they answer the question. If they have trouble explaining what they bring to the table that other lenders do not, that may be a sign to pass and find someone else.


Question #3 – How many __________ did you help last year?

Fill in the blank depending on what your investment strategy is.

  • How many families did you help?
  • How many investors did you help?
  • How many closings did you do?

Why is this important? Stephanie said, “According to the last stats that I read last year, the average loan officer closes 1.4 loans/month… If the guidelines are changing on almost a daily basis with updates, and there are a pretty decent number of programs that are out there and available, and you’re closing less than 2 loans a month as a loan officer, how are you going to be the best in your field? How do you know how to put that file together? How do you know how to get that approval? How do you have the experience to know how to work around the problem if you haven’t done it enough times?”

While the more loans isn’t necessarily the better in all cases, if the lender isn’t doing high volume, it may point to a lack of experience or expertise that you want for the lender on your team.



The three questions you want to ask when interviewing a potential mortgage lender for your team are:

  • What is the last time you read the guidelines book?
  • What kind of added value do you provide?
  • How many (families, investors, etc.) did you help last year?



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The Difference Between Debt vs. Equity Investing?

It’s been over three years since I raised money for my first multifamily deal. During that time, my knowledge about syndication, apartments, and real estate investing in general has grown substantially.


I remember after my first deal, I was talking to other investors and they asked me, “Did you raise debt or equity,” to which I responded, “Um, I just raised money. I have no idea.” I was very green at the time, but through experience, education, and mentorship, I’ve learned the answer to that question, as well as the answers to many more.


Amy Kirsch, who has over 10 years of financial services experiences, currently works for a crowdfunding company and is responsible for handling over a thousand inbound questions a week from inexperienced real estate investors like I once was.


In our recent conversation, when I asked her what types of questions she received, she mentioned that the question, “What is the different between debt and equity?,” was very common.


Equity vs. Debt


“I akin debt to a mortgage like you’d see at a bank,” Amy said. “You’re acting like the bank. You can expect an interest rate payment monthly. It looks like a balloon mortgage, where you can expect a principal after the life of the loan.”


“On the equity side, you look more like a business owner,” Amy explained. “You’re participating in the upside or the downside participation of the property.”


Pros and Cons


The main advantages of debt are lower risks and a steady income. “The debt is secured by a first lien loan, where should something go wrong, we’re able to foreclose on the property.” Also, the debt investor can expect a monthly or quarterly payout at around 8% annually.


The disadvantage of debt, compared to equity, is a cap on returns, which is limited by the rate, or preferred return, of the loan.


For equity, the main advantage is that there is no cap on returns. However, it is riskier than debt. “Should things perform well, you’ll have unlimited upside. Should things go poorly, you will partake in that as well,” Amy said. Depending on the business plan, the equity investor can realize gains on the sale of the property as well.




This is a high level overview of the differences between debt and equity. Debt is similar to being a bank, while equity is similar to being a stakeholder in a business. Debt has less risk and results in consistent payouts, but there is a cap to how much you make. Equity may or may not result in a higher return, depending on the projects performance, which make it more risky.


For more information on the differences, check out this Investopedia article:



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What’s the Cheapest Loan Program in America?

Steve Bighaus, who has 29 years of experience in the mortgage industry and originates about 300 loans a year, is one of many speakers who will be presenting at the 1st annual Best Real Estate Investing Advice Ever Conference in Denver, CO February 24th to 25th.


In a conversation with Steve all the way back in 2015, he provided his Best Ever advice, which is a sneak preview of the information he will be presenting at the Best Ever conference.


What was Steve’s advice? He explained the cheapest loan an investor can get, as well as the two main requirements to qualify for that loan.


What’s the Cheapest Loan You Can Get?


Steve, like many other lenders, sells his loans to Fannie Mae. In a matter of fact, from January 2009 through December 2013, Fannie Mae provided about $4.1 trillion in liquidity, which equates to 3.7 home purchases and 12.3 million refinances. That’s a lot of loans!


That being said, when Steve originates loans, he must adhere to Fannie Mae guidelines. According to Steve, “I tell people where I like to be as far as minimum loan size is about $40,000. The majority of my competition won’t go below $50,000.”


“I’ve had situations where maybe the appraisal doesn’t come in, or maybe it’s a couple thousand dollars lower,” he continued. “I can actually go down to $30,000. But that’s where Fannie Mae just stops buying loans.”


So, what does this mean for us as investors? With the typical residential investment loan requiring a 20% a down payment, an investor can purchase an investment property for as little as $37,500 and qualify for a loan ($7,500 down payment + $30,000 loan).


Best Ever Advice: Credit and Cash


Steve’s Best Ever advice for real estate investors is to “maintain your credit and keep cash.”


As for as credit goes, Steve explained, “If you own less than 4 financed properties, minimum credit score is … closer to 640.” That is over 40 points below the US average (687).


As far as cash, Steve is referring to cash reserves. “You have to have 6-months principle, interest, taxes, and insurances (PITI) on the subject property. Then, if you own maybe another investment property, 2 months of that PITI.” Steve elaborated by saying, “if you want a primary residence, we don’t count the primary residence.” In other words, he requires the 6-month cash reserves for investment properties and second homes only.


Steve also add that “we can use a combination of cash and equity” to meet the cash reserves requirement.




The minimum loan that Fannie Mae will purchase from a lender is $30,000. So an investor can obtain a loan on a property that’s valued as low as $37,500.


In order to qualify for such a loan, you must have a credit score of at least 640 and cash reserves equal to 6-months principle, interest, taxes, and insurance on the subject property.



Want to learn more about real estate investment lending, as well as information on a wide range of other real estate niches? Attend the 1st Annual Best Ever Conference February 24-25 in Denver, CO. It’s the only real estate investing conference whose content and speakers are curated based on the expressed needs of the audience. Visit to learn more!


Related: Best Ever Speak Brie Schmidt Sneak Peek How to Avoid the Shiny Object Syndrome in Real Estate Investor


Related: Best Ever Speaker Kevin Bupp Sneak Peek Lessons Learned From Losing Everything During the Financial Crash


Related: Best Ever Speaker Theresa Bradley-Banta Sneak Peek Don’t Invest in Real Estate on Unfounded Optimism and Emotions


Related: Best Ever Speaker Linda Libertore Best Ever Success Habit of the Nation’s #1 Landlord Aid


Related: Best Ever Speaker Kevin Amolsch Why Moving at a STEADY Pace is the Secret to Real Estate Success


Related: Best Ever Speaker Bob Scott and Jimmy Vreeland How to Acquire over 100 Properties in 24 Months Utilizing the Lease-Option Strategy


Related: Best Ever Speaker Jeremy Roll 3 Essential Factors of Diversification in Passive Real Estate Investing


Related: Best Ever Speaker David Thompson 3 Ways to Raise Over $1M for Your 1st Real Estate Syndication Deal


Related: Best Ever Speaker Al Williamson 4 Ways Showing Leadership Increases Your Property’s Value and Rents


Related: Best Ever Speaker Mark Ferguson The Most Commonly Overlooked Expenses in Real Estate Investing


Related: Best Ever Speaker Marco Santeralli 10 Rules of Successful Real Estate Investing



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What You Can and Can’t Do with the Self-Directed IRA


We have all wonder what you could and couldn’t do with a self-directed IRA. Fortunately, Kaaren Hall has come to our rescue. Kaaren is the President of uDirect IRA Services, LLC, where she has helped thousands of Americans invest their IRA into assets such as real estate, land, and private notes. In our recent conversation, she outlined the 4 main rules for what you can’t do with a self-directed IRA.


What Can You Do?


One of the pivotal definitions of the self-directed IRA is that one can invest in assets that are outside of the stock market, also known as uncorrelated assets. Therefore, the IRA account can be used to invest in many different types of assets, including:


  • Real Estate
  • Loan someone money to purchase real estate
  • Performing and nonperforming debt
  • Private stock
  • Precious metals
  • Land


What Can’t You Do?


When the IRS came up with the IRA rules back in 1974, they never stated what you could invest in. They only stated what you couldn’t invest in. The types of things you can’t invest in are very important because most of us are used to investing with cash. Self-directed IRA investing is not the same. It is its own little universe and has its own rules. According to these rules, you cannot commit a prohibited transaction. Therefore, it is a game of keep away from prohibited transactions.


1st Self-Directed IRA Rule


The first rule of the self-directed IRA universe is that you cannot have personal benefits from your IRA. For example, you cannot transfer money from your IRA into your personal checking account to buy a flat screen TV. The self-directed IRA is all about saving for later, not for spending today.


2nd Self-Directed IRA Rule


The second rule of the self-directed IRA universe is that you can’t buy, sell, or exchange assets between the IRA plan and people that are disallowed to your IRA. Disallowed people are your ascendants, descendants, and your and their spouses. Below is an example list of disallowed and allowed individuals:


  • Disallowed – parents, grandparents, your spouse, your children, your grandchildren, and all of their spouses
  • Allowed – aunts and uncles, nieces and nephews, brothers and sisters, and cousins


For example, you cannot use an IRA to purchase a property that your daughter will live in. However, there is nothing that disallows your niece from living in the property instead.


3rd Self-Directed IRA Rule


The third rule of the self-directed IRA universe is that you cannot have one of those disallowed people offer goods, services, or facilities to the plan. For example, Kaaren had an account holder bring them a purchase agreement for a property. When reviewing the document, they found that the broker of record was his father. This broke the rule because a disallowed person – his father – is providing services. The father was also asking for a commission. However, whether he would do it for free or charge a commission, a disallowed person cannot offer services and cannot benefit from the IRA.


4th Self-Directed IRA Rule


The final rule of the self-directed IRA universe is that you can’t invest in collectables or life insurance policies. Examples of collectables are fine wines, baseball cards, art, collectable coins, diamonds, etc.


Consequences of Committing a Prohibited Transaction


If the IRS says that you have committed a prohibited transaction, you will face financial Armageddon. This means that your entire IRA balance can be dispersed to you as a taxable event!



The Four IRA Rules Summarized: (1) One cannot personally benefit (2) Cannot sell, buy, or exchange with disallowed persons (ascendants, descendants, an spouses) (3) Disallowed persons cannot offer goods, services, or facilities (4) Cannot invest in collectables of life insurance policies



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Don’t Be a Slave to The Lender

In a conversation I had with Tom Nardone, he explained how he was able to go from being a mailman to a millionaire real estate investor, purchasing over 250 properties! How did he do it? Well, Tom’s best real estate investing advice ever, which allowed him to achieve financial freedom, is to not be a slave to the lender.


Tom’s strategy, which he would recommend to all investors, but especially to those that are just starting out, is that every time you perform a fix-and-flip, take the $20,000 to $30,000 profit and go out to the fringe areas of the town that you live in (where it starts to transition from suburban to rural). Then, try to find a little house where the numbers make sense and use your flip profits to purchase the property free-and-clear so that you never have to worry about having a mortgage company involved. Tom says that if he could go back and do it all over again, he’d stay away from the $300,000-$400,000 properties all together and instead, focus 100% of his energies on this business model.


Tom has lived through and survived two real estate crashes, but unfortunately, his friends, the ones that focused solely on the $300,000 properties, are no longer in the game. Because once the market crashed, these $300,000 properties dropped in value significantly, sometimes as low as $50,000, and were taken back by the banks! On the other hand, if you are purchasing a property for less than $50,000, chances are that it is not going to devalue any less than that. And if you are purchasing them free-and-clear, even if they do drop in value, you don’t have a bank knocking on your door demanding their money or the property, so you have the ability to ride out the storm.


Another benefit of purchasing these inexpensive properties free-and-clear is that if you plan on keeping them from your entire life, once you purchase 10 to 20, you will never have to worry about money again! This is the main reason why Tom recommends this strategy. If you own 10 properties free-and-clear that are renting for $700 to $1000 per month, you’ve created a foundation for yourself and for your family. Therefore, if something were to happen to you, you will have enough passive income coming in to cover the entirety of your family’s expenses!


Once you have this foundation set up, you are essentially no longer on the treadmill of life and you no longer have to worry about how you are going to pay the bills next month. With this type of freedom, you can decide whether or not you want to simply retire and enjoy life, or if you want to move into risker investments. But the best part is that you have the choice to do whatever you want!


How would your lifestyle change if you were able to build a large enough financial foundation that you never had to worry about how you were going to pay the bill again?


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hud multifamily loan programs for urban development

Explaining Some of the HUD Multifamily Loan Programs in Plain English

2..21. D, 4. SET. HUT…HUT, HUT.

No, the 221(d)(4) is not referring to something a stud Texas Tech quarterback would call out before being snapped the ball. (p.s. I’ll give you one guess where I went to school.)


It is, however, one of the HUD multifamily loan programs for “new construction or substantial rehab work of multifamily properties for moderate-income families, elderly and the handicapped,” according to the HUD website. It ensures the lender against any loss on mortgage defaults (i.e. it takes the risk out of the lender’s court).


There’s surprisingly very little info out there on the program, and the info that is out there isn’t the easiest to understand. Some may even have trouble finding out how to get commercial real estate loans like this.


As of today, I have not done any of the HUD multifamily loan programs, but I am considering the 221(d)(4) for my next purchase. So I thought I’d take some time to investigate more about it and speak to people who have first-hand experience with this program.


To get the scoop on the program I went to an expert. Brad Armstrong, president of Armstrong Mortgage Company, who has successfully originated over 50 221(d)(4) loans. I also talked to seasoned investors who are familiar with the program.


First, why the heck should you care about HUD multifamily loan programs, specifically the one mentioned at the start of this article? Glad you asked.


  • Non-recourse loan (that’s necessary)
  • Up to 40-year amortization (that’s…wow)
  • Loan up to 83.3% of costs (uhhh…yes, please!)

So you can see the benefits are pretty compelling. Because it is non-recourse, the only way HUD can recoup losses should there be a mortgage default is to take back the property. Therefore, they are primarily looking at these two things:


  1. Will it actually be built? That means developer and team credibility and past experience is critical.
  2. Are the Pro Forma projections accurate? They want to make sure that, once it’s built, it will make money.

When talking to seasoned investors, some of them were against this HUD multifamily loan program due to some drawbacks. Here’s what they said.


  • Takes a long time
  • Lots of paperwork
  • Expensive approval process

As with a lot of government programs, there is a lot of paperwork, and it is very time-consuming. It is essential, according to EVERYONE I spoke to, to have a HUD consultant. It should be someone who has gone through the process and knows the language and can guide a first-timer through how to get commercial real estate loans like this successfully.


The underwriting process is going to be 180 days total. 90 days for a soft commitment that basically says “yes, we like your project and it will be approved contingent on these stipulations.” And, 90 days for a firm commitment.


For each stage in the process of applying for the 221(d)(4) HUD multifamily loan program, soft and firm commitment, there is paperwork and reports that are required.


hud multifamily loan programs feesAs far as it being an expensive approval process, there is an upfront, non-refundable fee when you apply for the program. That fee is 3/10 of a percent of the requested mortgage, and half of that is non-refundable. Additionally, during the construction phase, there is a fee of 45 basis pts to review construction. And, after construction is completed, there is an ongoing mortgage insurance premium fee that’s paid monthly of 65 basis pts.


One other thing to note, if you have investors, you will only be able to do cash distributions every 6 months or once a year because of the audits that are required under this program. Whereas, with other lenders, you might be able to distribute cash to investors monthly or quarterly.

The verdict?

My overall takeaway is that, if your project qualifies, then the 221(d)(4) HUD multifamily loan program is worth doing, as long as you have someone on your team you trust and has successfully gone through the process many times before. All the fees that are charged are outweighed by the advantages, and, in the end, you’ll come out with better returns.

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