Rehab Loan Rates & Investing in Multifamily Renovation Properties (2024)

09 Sep 2020

If you’re considering getting on the investment property ladder or are wanting to expand your portfolio, a multifamily property is an option worth seriously considering. A multifamily property – any property with more than one unit – is thought to be one of the best ways to build wealth from a rental property investment, making it a worthwhile investment strategy. And better still is a multifamily value-add – that is, purchasing a multifamily property in need of renovation.

Types of multifamily properties and Rehab Loan Rates

Multifamily properties include anything from a property containing two distinct premises (also known as a duplex) to sites with hundreds or even thousands of apartments and everything in between. This means that multifamily properties offer a range of opportunities for investors with various budgets and capacity.

Why invest in a multifamily purchase renovation

Multifamily property purchases are a great investment option for a number of reasons. For starters, owning a multifamily property means receiving ongoing income from multiple sources, making it a fairly low-risk option for investors and commercial real estate lenders alike. Additionally, multifamily properties offer several tax benefits, and, since multifamily properties are considered one property despite multiple occupants and therefore income sources, it is relatively straightforward in terms of managing a single loan and insurance policy.

When you choose to buy a multifamily property in need of renovation, you’ll also be buying an opportunity to add a huge amount of value whether you plan to rent each apartment or sell once your project is complete. Purchasing a property that needs renovating means you can get it for a price much lower than a property in good or perfect condition. If the multifamily property you’re purchasing is in need of extensive rehab, use this to negotiate a better purchase price and therefore maximize your margins.

Another bonus of buying and renovating a multifamily property is the ability to live in the property while undergoing renovations, saving you on living costs.

How to maximize the potential of a multifamily purchase renovation and finding the best rehab loan rates

• Plan carefully. When planning a multifamily renovation project, starting with a clear business plan that factors in all costs is essential. Don’t forget to consider how long each unit will be empty for and therefore not generating income and the impact this will have on your bottom line. Also consider the cost of all the work that needs doing, plus ongoing costs such as property management, your loan repayments and insurance.
• Shop around. Because multifamily properties vary so greatly, the terms, rates and loan amounts for financing a multifamily purchase renovation also vary greatly. It pays to do your research and find the loan that best suits your needs.
• Don’t skimp on the improvements. If you’re going to renovate a multifamily property, you may as well do it whole-heartedly. Depending on the state of the property, you may need to replace everything from the cabinets to the flooring to the lighting. Research your potential renters or purchasers and appeal to their tastes and lifestyle. Also factor in creating a curb appeal – remember first impressions are everything. All these details, whether it’s a landscaped garden, brand new appliances or modern flooring will go a long way to maximizing your return on investment.

Keep in mind that purchasing and renovating a multifamily property via a commercial bridge loan or bank loan is a huge undertaking with a lot of ongoing management and maintenance. Of course you have plenty of options to make it work for you – you could complete the rehab and then sell, or rent self-managed or with a professional property manager.

How to fund a multifamily purchase renovation with the best options and rehab loan rates

Multifamily properties can be expensive but this doesn’t mean it needs to be out of the question for you – even if you don’t have a down payment at hand. Because multifamily investments are considered less risky than other property purchases, it can be surprisingly easy to get a loan and there are a number of options available. Generally, financing for multifamily properties is based on the property – rather than your own financial situation. This means that you’ll be able to invest in a multifamily renovation property even if you have a bad credit score.

When it comes to finding finance for a multifamily purchase renovation, your options depend on the property you’re hoping to purchase and whether you plan to renovate or not. For instance, if you are purchasing a duplex or a smaller site with only a handful of separate dwellings, this property will be classified as residential and therefore a residential purchase renovation loan is what you’ll need. However, if you’re looking at a property with five or more apartments, you’ll be venturing into commercial real estate territory and therefore will require a commercial renovation loan with the applicable rehab loan rates.

Potential loans for real estate investors wanting to purchase a multifamily property includes:

• Conventional mortgage. A standard mortgage might be an option for your property purchase if you are purchasing a multifamily property with no more than four units and don’t intend to renovate. A conventional mortgage generally offers lower fees and is a great option for a long-term strategy. Keep in mind you’ll need to make a down payment to get this over the line and will also need a good credit history.
• Government-backed loans. Funded under the Fannie Mae, Freddie Mac and FHA Programs, government-backed loans are another option particularly for investors who want to live in one of the premises and rent out the rest. These generally incur lower interest rates and require a smaller down payment.
• Balance sheet or portfolio loans. These loans are non-conforming loans attracting terms between three and thirty years, ideal for investors who want flexibility. Of course this added flexibility comes with higher interest rates, but these rates can usually be fixed or variable.
• Multifamily construction loans or rehab loans. These loans are generally short-term and are used to fund the development or renovation of multifamily properties. Often, construction loans including renovation construction loans only require you to pay the interest while the project is ongoing with the full amount to be repaid or refinanced once you’ve completed the renovation or build. Be prepared for interest rates to be higher.
• Other short-term loans. Other short-term loan options include bridge loans including hotel bridge loans, commercial bridge loans, and hard money or private money loans. Hard money and private money loans are an ideal way to get your project over the line even if you have a minimal down payment available or have a bad credit history.

At Alpha, we are a hard money commercial real estate lender offering a range of multifamily purchase and renovate loans with competitive rates and terms. To find out more, get in touch and one of our friendly agents will happily answer questions and talk you through our easy application process.

Otherwise, if you’re ready, Apply Now.