What is a multi-family residential loan (5 units or more)?
Buildings with five or more livable units are considered multi-family residential properties for mortgage and insurance purposes. A few examples of these include a townhouse, a row home, and an apartment building.
In Canada, multifamily properties make up the lion’s share of commercial real estate because of its widespread appeal and substantial market share. There is a plethora of inventory and a variety of options available to accommodate different types of buyers.
Keep in mind that buying a multiplex with five or more apartments requires a different procedure and follows a different set of rules than buying a multiplex with four units or less.
Who is a multi-family residential loan (5 units or more) for?
Buyers looking to grow their real estate portfolio
Investors aiming for low-risk investment opportunities
How does a multi-family residential loan (5 units or more) work?
You will need a commercial mortgage loan to buy this type of property because of its classification as a commercial asset.One of the most significant distinctions between purchasing a building with five or more units and purchasing a structure with four or fewer units is that the latter requires you to apply for a conventional mortgage loan, just like you would if you were purchasing a standard house. This is because conventional mortgage loans are generally only available for properties with four or fewer units. The requirements for getting approved for each of these loans are what set them apart from one another.
The profitability of the building is the most important factor in determining whether or not you will be approved for this type of loan, but other factors, such as your real estate management experience, the building’s location, the state of the building, the occupancy rate of the units, and the cash on hand after financing the property, will also be considered.
The Canadian Mortgage and Housing Corporation (CMHC) requires borrowers to have a net worth equal to at least 25% of the loan amount (not including the down payment) in order to be eligible for a multi-family mortgage.
For a CMHC loan, a borrower must have a minimum net worth of $100,000.
What are the advantages?
- There is a large pool of commercial lenders that are keen to provide excellent financing for apartment buildings because of the asset class’s track record for stability and low risk.
- Typically, funding can be obtained through traditional means or through CMHC-insured loans.
- The most attractive feature of CMHC-insured financing is the possibility of locking in exceptionally low interest rates over an extended period of time. The lender assumes almost no risk with an insured loan and can therefore provide more competitive interest rates.
- Given that residential loans are based in part on the borrower’s personal financial situation, there is a maximum number of properties that one can own.
- The standards differ for commercial projects, where the building itself is the most crucial element. The borrower/buyer is then analyzed. It’s possible to own as many properties as you like if they generate enough income to cover their costs.
- Rental properties have the potential to supply a reliable source of monthly cash flow.
- The equity you build in a multi-family property may allow you to expand or invest in new real estate opportunities.
- If you wish, you can move into one of the units in the complex.
- Rental income from commercial space in a mixed-use building can be substantial, and the building itself can be used to house a business.
- Investing in affordable multi-family housing is a great way to help revitalize neighborhoods. This can be good for the local economy.
Cash Flow
Dividend stocks and annuities are two examples of assets that pay out to investors, but they can’t compare to the cash flow created by apartment buildings.
Leverage
With multifamily properties, buyers can put down as little as 20% to 30% and spread out their payments over a 25–30-year amortization period, which is a huge financial advantage. In general, stocks, bonds, mutual funds, and other forms of investment options do not provide such a benefit.
Tax Incentives
It is more convenient for managers to have multiple “doors” under one roof. Less time and money are spent on travel for routine inspections, repairs, and emergencies when fewer buildings are involved. This means that taking care of the property on your own will save you money in property management costs and cause you less stress.
Increase in Equity
To a similar extent as with a single-family house, an investor’s equity in a rental property increases when the mortgage is paid down. Also, if the value of the property rises, so will the amount of equity.
Possibility of Partnerships
Apartment buildings are a great group investment because unlike stocks and bonds, most investors may pool their resources to buy into the property. You can buy more valuable buildings at a lower per-unit cost if you pool your resources with other investors.
Additional Income
Although rent collected from tenants is the primary source of income for an apartment building, diversifying the complex’s revenue stream can make a significant impact. Laundry machines, vending machines, and parking spots for visitors are typical sources of extra cash flow (which can generate a considerable amount of revenue in sought-after areas).
Low risk
Vacancy risks are lower for multifamily buildings. When you own multiple units, the loss of a single tenant doesn’t leave you with a vacant house like it would if you only owned single-family homes.
What are the disadvantages?
- CMHC’s requirement for securing a multi-family mortgage is to have a net worth equal to or more than 25% of the loan amount. The property down payment is not part of this 25%. A CMHC loan requires a borrower to have a minimum net worth of $100,000.
High Cost of Market Entry
Many aspiring investors are prevented from entering the market because multifamily properties are typically far more expensive than single-family homes. Not only that, but most lenders demand a larger initial investment of your money (at least 20%).
Time Commitment
There is a lengthy process involved in finding, financing, and purchasing an apartment building. You can hire a property management company to take care of many of the day-to-day tasks of owning an apartment after you buy it, but you’ll still need to spend some time overseeing the company to make sure your investment keeps making money.
Considerations Unique to Each Market
Smart multifamily investors pay attention to location when buying property, but the future is unpredictable. Your investment could plummet in value if, for instance, crime and poverty increase in the area you believed was gentrifying.
Vacancy Rate and Tenant Complaints
Tenants are the lifeblood of an apartment building, generating as much as 95% of annual income. Tenants with excellent payment histories and lengthy contracts can nevertheless abruptly vacate your property at any time. There are also renters who may eventually fail to pay rent or who cause extensive damage to your building.
Liability
Even if a prudent property owner has a solid insurance coverage in place, they may still be held legally responsible for injuries sustained on the premises or crimes committed there. For comparable investments such as stocks, bonds, and real estate investment trusts, this risk is virtually nonexistent (REITs).
Costs Associated with Maintenance
Landlords are responsible for the upkeep of the structure, including the replacement of worn-out parts such as windows, railings, appliances, and light bulbs. Larger objects may be covered by insurance, but there will still be major expenditures for upkeep, repairs, and replacement costs.
Reduced Liquidity
An apartment complex is not like a stock or bond that can be bought and sold with a few mouse clicks, and even if it could, you might not obtain the price you were hoping for. The sale of a multifamily building might take many months, and the closing procedure can add even more time.
What do I need to get started?
These deals can help you grow your portfolio quickly, give you more cash flow, and lower the chance that a property will become vacant. You can also take advantage of some great tax benefits.
However, investing in multi-family properties is not for everyone. If you think multifamily investments are in your future and you’re ready to deal with multiple tenants (or pay a property manager to handle it for you) and you’re not afraid of higher operating costs and maintenance fees, then schedule a call with us!
