If you own a small multifamily property—now, more than ever—it’s good to be you. For the better part of a decade, a robust multifamily market has delivered low vacancies and higher rents. Post-recession, 2015 has been the strongest year for the rental market so far1.
With apartment values up more than 120 percent since the end of 20092, lenders are sharpening their pencils to meet another growing demand: owners of small apartment communities looking to capture market improvements by refinancing.
Indeed, now is a great time for a mortgage reboot, especially if your loan was originated in more difficult economic times. Multifamily market growth is ongoing and rates are still near historic lows. Without the right preparation, though, you could find yourself short-changed.
Here are five tips to help you put the most cash in your pocket:
1. Aim for Accuracy. Keeping accurate financial statements for your property is essential. If your records are spotty, it’s difficult for lenders to accurately size a loan, which could reduce the cash you take away from the deal. To get the most bang for your buck, make sure you have at least three years of historical annual operating financial statements and monthly rent rolls. If you made any capital improvements in the past, be sure you include explanations on your statements.
2. Show Your Property Some Love. Long-term ownership and regular property maintenance demonstrate commitment and pride of ownership. It also goes a long way in getting you the best loan terms. A lender looks for communities that are clean and well-maintained with limited deferred maintenance. Serious deferred maintenance issues mean your lender may require you to escrow a portion of your proceeds to cover repairs, reducing your cash in-hand after closing.
3. Strive for Stability. Volatility in expenses, income, or occupancy makes it difficult for lenders to project underwritten income. Strive for consistent operations and avoid months with large spikes in vacancy or expenses. If you do have an isolated spike in expenses or a dip in occupancy, be sure you can provide a justification.
4. Don’t Count Out Affordable Properties. While some lenders might shy away from cash-outs on older B- and C-class properties with lower than market rents, Freddie Mac Multifamily does not. A cash-out refinance is possible as long as the property meets the “four S’s” of its credit standards.
- Safe: Minimal crime on site, good security, and a thoughtful and aggressive management team. Tip: Google your property to see what lenders might see during their due diligence period.
- Stable: Stable cash flow and timely capital expenditures.
- Structure: Well-maintained and in sound condition. In some cases, architectural detail and property character can be a competitive advantage.
- Sponsor (owner): Sufficient net worth and liquidity, and a proven track record.
5. Take a Fresh Look. Even if you already have a go-to source for financing, now is a good time for you to evaluate new funding sources. You owe it to your business, especially if you have owned your property for at least three years and it has experienced rent growth, or you have made improvements to boost rent potential.
At Freddie Mac Multifamily, we’re changing the way small apartment loans are done by giving you more choices, better terms and a simpler loan process. It’s how we funded more than $2.5 billion in small loans last year alone.
Whether your goal is to grow your portfolio, improve returns on existing assets, or meet other financial goals, Freddie Mac has the strength, expertise, and reliability to get you there.
Visit us to learn more about our Small Balance Loans or to request a quote.
- Multifamily Outlook 2016, p.3, Feb. 10 2016.
- Moody’s/Real Capital Analytics Commercial Property Price Indices (RCA CPPI™), Q4-2015.