Multifamily properties can be called the “backbone” of commercial real estate. They are always in demand, easier to manage and understand than office or industrial properties, and less subject to large swings in value. The purchase of a multi-family property is almost always made by using leverage – obtaining an acquisition loan from a bank, a life insurance company, or a private money (hard money) lender. While banks are, and have been for years, the primary source of funding for multi-family, increasingly, the private money lender loan is becoming competitive and, in certain instances, a more desirable source of funding.

What Is A Multifamily Property?

A multifamily property is any residential building with more than one unit — from a duplex or triplex all the way up to a large apartment complex with hundreds of units. In the lending world, however, there is an important line drawn at four units. Properties with two, three, or four units are generally treated as residential real estate. 

Once a property reaches five units or more, it crosses into commercial real estate territory, and the rules — including how lenders evaluate, underwrite, and structure loans — change significantly. This guide focuses primarily on commercial multifamily properties: five units and above.

If you have ever financed a single-family home or a small duplex, the process for a commercial multifamily loan will feel quite different. Residential loans are largely standardized — lenders follow guidelines set by Fannie Mae, Freddie Mac, or the FHA, and approval is heavily driven by your personal income and credit score. 

Commercial multifamily loans, by contrast, are evaluated primarily on the performance of the property itself. The income the building generates, its occupancy rate, its condition, and its location all carry significant weight. This shift — from borrower-focused to property-focused underwriting — is one of the defining features of commercial real estate lending, and it is one reason private money lenders can be so effective in this space.

Bank Multifamily Loans vs. Private Money Multifamily Loans

Choosing between an institutional loan and a private (hard money) loan is the first decision in the financing process. There is a tradeoff involved. Bank loans typically have lower interest rates and potentially longer maturities, while private money loans involve less red tape, are more flexible in their structure, and can be closed more quickly. Understanding the differences between the processes of obtaining each type is important.

Bank Loan Requirements

Banks, because they accept deposits, are strictly regulated by the departments within the Federal Reserve Bank. Banks normally have strict credit score requirements for their real estate borrowers. Borrowers with credit scores under the low 700s may have difficulty getting a loan. Banks also require an initial investment of around 20% (or more) of the total acquisition price of the property. 

Banks also have strict DSCR (debt service coverage ratio) requirements. This means that the income from the multi-family property, after paying all operating expenses, must be at least 1.2 times the annualized debt service payment. Banks carefully scrutinize the income and expenses of the property and have their own specific requirements for analyzing these figures. If the actual income and expenses are more favorable than what the bank expects, the bank will probably impose its own income and expense ratios instead of using the actual ones. 

In addition to these requirements, banks will look at a borrower’s “global financial picture.” They want to know not only the income and expenses of the property for which they need a loan, but the income and expenses of any other property owned by the prospective borrower, and they look at all of the borrower’s personal expenses as well. They analyze several years of personal income tax returns, too.

Taken together, these requirements — the credit score floors, the down payment minimums, the strict DSCR calculations, and the deep dive into your global financial picture — mean that a lot of otherwise good deals simply don’t get funded by banks. A property that needs work may not pencil out on a bank’s income-and-expense analysis even if the upside is obvious. A borrower who is asset-rich but shows modest income on paper may not clear the personal financial hurdles. And a deal that needs to close in three weeks rather than three months is almost certainly not a fit for traditional bank financing. This is where private capital fills the gap.

Private Money Loan Requirements

Unlike banks, the private money lender is focused on just one factor for multi-family purchases: they want to keep their loan amount at a very conservative loan-to-value ratio. While banks may lend up to 80% or even 85% loan-to-value, a private money lender normally will not go over 65% loan-to-value. 

The private money lender is less strict about borrowers’ credit scores, less strict about the DSCR (sometimes they will even lend with a negative DSCR), and less strict about the global financial picture. These lenders are basically “asset-based lenders.” If the asset is a good one and the loan-to-value ratio is conservative, the private money lender will almost always be able to close the loan — and close far more quickly than bank lenders. This is more of a “common sense” approach to lending vs. a strict credit/cash flow-based approach.

Size Matters

The distinctions discussed above change when the size of the loan increases. For loans of over $25,000,000, there are new types of lenders. Pension and profit-sharing plans and life insurance companies like to fund large multi-family loans. They are typically slightly more conservative in the LTV than banks. If a bank will go 80% (perhaps higher), the pension and profit-sharing or life companies will go up to 70% or so. On these very large loans, they typically do not even require personal loan guarantees — something that banks almost always require.

Equity Participation and Mezzanine Debt

There are certain firms — for example, Wall Street firms — that will offer hybrid loans where the initial interest rate is more favorable, but the lender takes a certain percentage of the ownership of the property. Alternatively, the lender may ask for a certain percentage of the profit when the property is sold. A variation of this type of loan, called mezzanine debt, has the lender taking a security interest in the actual ownership group itself, in addition to a security interest in the property. These loans are complex and not something the average property investor would encounter. The total interest rate for this type of loan is far higher than either a bank interest rate or a private money interest rate.

How to Get a Private Money Loan to Acquire a Multifamily Property

Getting a private money loan can be as simple as making a phone call to a reputable private money lender, or as complicated as preparing a full loan request package. The more complete a package a prospective borrower can provide, the higher the chance they will be successful in getting their loan closed. Private money lenders are sensitive to the experience and sophistication of their borrowers. Someone who can provide a package that includes the signed purchase and sale agreement, the historic income and expense of the property for the past two to three years, a complete personal financial statement of the loan guarantor, copies of the loan guarantor’s past two years of personal tax returns, and a brief résumé explaining the prospective borrower’s experience in owning and managing multifamily properties stands a much better chance of getting their loan approved quickly and with more favorable terms. If there is going to be a renovation of the multifamily property, then a complete description of what will be done, how much it will cost, and how long it will take is also needed.

One item that sophisticated borrowers include — and that makes a strong impression on private lenders — is a clearly defined exit strategy. How do you plan to repay this loan? Will you refinance into a bank loan once the property stabilizes? Sell the asset after the renovation is complete? Hold it long-term and use cash flow to pay it down? Private money loans are typically short-term by design, and lenders want to see that you have thought through how and when you plan to exit. Including a brief, realistic exit strategy in your loan package signals that you understand the nature of private capital and have a plan, which goes a long way toward getting your loan approved.

What to Look for in a Private Money Multifamily Loan

The basic information the prospective borrower needs to know when evaluating a loan includes: 

• What is the loan amount? 
• What is the interest rate? 
• Are payments interest-only or amortized? 
• What is the length of the loan? 
• Can the loan be extended at the option of the borrower? 
• Are there any prepayment charges if the loan is paid off early? 
• Does the lender need an appraisal? 
• Will the loan require a personal guaranty? 
• How long will it take to close the loan? 
• How long has this lender been in business? 
• Can they provide references to other borrowers they have funded loans for? 

Once you understand the answers to these questions, you are in a good position to decide if this is the right loan for you.

Risks and Considerations When Using Private Capital

Private capital is a powerful tool, but it is not without tradeoffs. Before committing to a private money loan, every borrower should go in with a clear understanding of the following:

Higher Interest Rates

Private money loans carry higher interest rates than conventional bank financing. This cost is the price of speed, flexibility, and access — and for the right deal, it is absolutely worth it. But the rate needs to be factored into your pro forma from day one. A deal that works at a 7% bank rate may look very different at 10–12%.

Shorter Loan Terms and Balloon Payments

Most private money loans are structured for one to three years, sometimes with extension options. At the end of that term, the full balance is due. This is not a problem if you have executed your business plan and are ready to refinance or sell — but if the market has shifted or the renovation has taken longer than expected, a balloon payment coming due can create real pressure. Having a contingency plan is not optional; it is essential.

Exit Strategy Discipline

Related to the above, the single biggest risk in using private capital is not having a clear path out before you go in. Borrowers who treat a private money loan as a long-term solution rather than a bridge to something else are the ones who find themselves in trouble. Know your exit before you close.

Legal and Compliance Considerations

The terms and documentation for private money loans can vary significantly from lender to lender. It is always advisable to have a real estate attorney review the loan documents before signing. Pay particular attention to default provisions, extension fees, and any clauses related to prepayment.

Lender Quality Matters

Not all private lenders are the same. Look for lenders with a long track record, verifiable references, and a reputation for transparency. A lender who has been in business for decades is far less likely to change terms at the last minute or create problems at closing than one who is newer to the market.

Why Use Montegra for Your Loan?

Private capital is not the right financing tool for every deal or every investor — but for the right situation, it can make the difference between closing on a great opportunity and watching someone else buy it. If you are evaluating a multifamily acquisition and want to understand whether a private money loan makes sense, the best next step is a straightforward conversation with an experienced lender.

Montegra has been funding loans on multifamily properties for over 50 consecutive years. We have a reputation for being the “gold standard” for ethical hard money loans in Colorado. Our rates are at the lowest end of the private money lending spectrum. Call Bob or Kim at 303-377-4181, contact us online, or email bob@montegra.com or kim@montegra.com.