How to Calculate Multifamily Mortgage to Find the Best Deal

If you’re investing in multifamily homes, you can use a multifamily mortgage to fund your purchase. Learn to find the best deal for your business.

Table of Contents

1. What Is a Multifamily Home?
2. What Is a Multifamily Mortgage?
3. Types of Multifamily Mortgages
4. How to Calculate a Multifamily Mortgage
5. How to Know if a Multifamily Mortgage Is a Good Deal

Despite being in the middle of a pandemic, multifamily real estate boomed in 2021. The prices of multifamily housing continue to rise, along with high demand, low vacancy rates, and growing rental rates. Real estate investors experienced overall record-high prices and strong yields from multifamily income properties. With almost full traditional rental occupancy and constantly rising rents, the multifamily real estate market continues to thrive throughout the beginning of 2022. 

In fact, many real estate experts believe that since the demand remains high, housing prices will keep rising this year. Because of this, many residents will prefer to rent since it’s difficult for them to find a house that they can afford to buy. Moreover, experts also expect migration from bigger cities to suburbs to continue, which will contribute to an increased demand for housing. This means that the demand for rental properties will remain high, vacancies will stay low, and rental rates will keep growing. 

The rising demand for rentals makes multifamily investing an excellent option for many investors. After all, multifamily homes are the go-to property type that’s best for traditional rentals. You can own several units and earn rental income from each unit but don’t have to go to different locations to manage tenants. This is the reason why many investors are buying an apartment complex to quickly build their portfolio rather than buying multiple single-family homes.

If you are thinking of investing in multifamily properties, you should know the different multifamily mortgage options available. Also, learning how to calculate multifamily mortgages is essential in helping you find the best deal for your investment. Multifamily loans are a good option for both new and seasoned investors who are planning to invest in a duplex or a multi-unit home. 

What Is a Multifamily Home?

A multifamily home is composed of two or more housing units within the same building. This type of property is structured so that two or more families can live separately in a single building. Multifamily properties can have two or more dwellings, such as duplexes, quadplexes, and even small apartment complexes.

A multifamily property is one of the most common investment properties for traditional rentals. In many cases, beginner investors buy a multifamily home to live in one of the units while renting out the others. Experienced investors who want to expand their rental property investment consider investing in multi-unit properties to quickly grow their portfolios. Whatever level of investor you are, you should consider financing your multifamily investment through any of the available multifamily mortgage loans. 

Related: The Best Way to Find Multi Unit Properties for Sale

Multifamily Home vs. Single-Family Home

A single-family home is designed to accommodate one family in a single dwelling unit. You can rent out a single-family home entirely, or you can rent it out on a per-room basis (for instance, as an Airbnb rental). Usually, a single-family home has one common entrance and it has shared facilities like a bathroom, toilet, garage, and kitchen. 

On the other hand, a multifamily home has multiple units—usually two to four. Each dwelling unit has its own entrance and a unique home address. In addition, each multifamily unit has its own kitchen, bathroom, toilet, and parking space. However, multifamily complexes share walls with the next-door dwelling unit.

Because of this, some people think that multifamily properties have less privacy because next-door neighbors are living close together. Typically, multifamily homes are rented out as traditional rentals.

Related: Single Family Homes—Advantages & Disadvantages

What Is a Multifamily Mortgage?

A multifamily mortgage is a type of loan designed to finance properties with multiple units, including duplexes, quadplexes, and apartment complexes. If you are planning to invest in multifamily homes for sale, knowing the different types of multifamily financing is essential. Multifamily loans are ideal for both beginner and experienced investors looking for a mortgage for multifamily property. 

Since multi-unit properties are usually more expensive, multifamily financing is significantly larger than single-family loans, ranging from $1 million to over $1 billion. Some types of multifamily loans also offer a loan amount as low as $100,000. The current multifamily mortgage rates vary depending on the type of the loan and can change from time to time. Some multifamily loans have interest rates below 3% with terms of up to 30 to 35 years. In most cases, shorter terms are also available.

Multifamily Mortgage vs. Single-Unit Property Loans

A multifamily mortgage is a loan for residential rental properties with two to four units, using the property as collateral. In some cases, investors can also take a multifamily loan to finance a small apartment complex. Usually, a multifamily home is bought as an investment property for rentals. These loans typically offer higher loan amounts and longer terms, but this will vary from one borrower to another. 

On the other hand, a single-family loan is a home loan designed for single-unit properties or independent residential structures. Single-family loans offer a variety of terms, ranging from five years to 30 years. Also, the amount of loan provided for single-family financing is typically lower than the loan amount provided for multifamily mortgages.

Types of Multifamily Mortgages

When finding the best financing option for your multifamily investment, you may consider one of the four types of multifamily loans. Your options include conventional multifamily loans, government-back multifamily financing, portfolio multifamily mortgage, and short-term multifamily loans. 

Conventional Multifamily Loan

A conventional multifamily loan is best for real estate investors who prefer a traditional financing method for a multifamily property. This type of loan is offered by traditional banks and conventional lending institutions. Conventional multifamily financing typically has terms ranging from 15 to 30 years and can have either fixed or variable interest rates. 

The conventional multifamily mortgage rates are usually competitive, starting from 4.75% or higher. However, conventional loans typically have strict qualification requirements. Borrowers should have a minimum credit score of 680 (or even higher, depending on the lender), and up to 12 months of cash reserves.

The maximum loan amount for conventional loans will be based on the property’s number of units. For example, if you’re buying a duplex through a conventional mortgage, you can get a loan amount between $828,700 and $1,243,050. The maximum loan amount should meet the qualification and loan size requirements set by the Federal National Mortgage Association, commonly known as Fannie Mae.

Government-Backed Multifamily Loan

A government-backed mortgage is a type of financing that is insured by a federal government agency. These agencies include the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), and the U.S. Department of Agriculture (USDA). Government-backed multifamily financing follows the guidelines from Fannie Mae, the Federal Home Loan Mortgage Company (Freddie Mac), or FHA. 

FHA multifamily loans usually offer up to 87% loan-to-value on loans with a minimum of $2 million. FHA typically requires a credit score of 500 or higher and a debt-to-income ratio of 43% to 60%. In contrast, Fannie Mae and Freddie Mac are not federal government agencies. They are government-sponsored enterprises that set the conforming rules for mortgages. However, in some cases, you can apply for Fannie Mae and Freddie Mac loans through a secondary market. 

It’s important to note that these government agencies do not provide the funds for the multifamily mortgage. They simply insure the loan, taking the risk off the lenders who will actually provide the financing. The terms for each type of government-backed loan will be slightly different, and they have different costs that include upfront fees and mortgage insurance requirements.

When considering government-backed multifamily loans, make sure to find out the minimum occupancy requirement of the loan. They can either have fixed or variable interest rates and have terms of up to 35 years. 

Multifamily Portfolio Loans

Investors who cannot qualify for a conventional mortgage can opt for a portfolio loan.

Multifamily portfolio loans are mortgages for multifamily properties that a lender originates but does not offload on the secondary market (to Fannie Mae or Freddie Mac). This means that the lender sets their own standards and can even tweak their guidelines in favor of the borrower. However, most of the time, portfolio loans can have higher interest rates, especially if they allow higher debt-to-income ratios, loan-to-value amounts, and loan size maximums.

Since portfolio loans offer larger loan amounts, they are typically a good choice for multifamily financing. In addition, portfolio loans are also best for investors who want to finance multiple properties using the same mortgage. Keep in mind, however, that portfolio loans can come with costly fees compared to conventional and government-backed loans.

Short-Term Multifamily Mortgages

Short-term multifamily loans such as hard money loans and bridge loans are best for fix-and-flip investors or those who need to rehabilitate a property. Usually, investors who cannot qualify for traditional or government-backed mortgages due to low credit scores opt for short-term loans. This type of multifamily mortgage offers terms that range from six months to three years, with a minimum loan amount of $100,000. 

At the end of the loan term, borrowers can either refinance the property into a permanent loan or sell it for profit to pay off the debt. Normally, investors who invest in rental properties for sale don’t choose this type of mortgage unless they’re sure to pay off the loan when the term ends. It’s also worth noting that short-term loans tend to have higher interest rates compared to other multifamily mortgages. This is because the qualification requirements for short-term mortgages are usually less stringent.

Learn More: Short-Term Mortgage—The Complete Guide

How to Calculate a Multifamily Mortgage

To determine which type of loan will work best for you, it’s crucial to know how to calculate the different types of multifamily mortgages. You need to find out how much your expected monthly payments on a specific type of mortgage will be. This way, you’ll be able to decide whether the returns from the rental property will be sufficient to cover your expenses and mortgage payments.

To calculate a multifamily mortgage, you need to determine the following information:

• Loan amount
• Interest rate
• Loan term
• Number of amortization payments per year

It’s best to use a multifamily mortgage calculator to get an accurate computation. However, you can also calculate the loan amortization schedule using an Excel spreadsheet. Doing this manually can be tedious and may be prone to error. While it is possible, it may not produce an accurate computation especially if you choose a variable interest rate for your loan.

Monthly Amortization Payment Formula

You can also try to calculate your monthly loan payments manually using the following formula:

Monthly payment = a / { [ (1 + r ) ⁿ ] – 1 } / [ r ( 1 + r ) ⁿ ]

Where:

• a = loan amount
• r = periodic interest rate
• n = total number of payment periods

To get the periodic interest rate, divide the annual interest rate by the number of payment periods.

For example, you’re interested in a quadplex for sale and plan to take a multifamily loan of $150,000. This loan has an annual interest rate of 6% and a 30-year loan term. You will repay the loan through monthly amortizations. To calculate your monthly payment, you first need to convert the interest percentage to a decimal format. 

Substitute the variables:

• a = $150,000, the amount of the loan
• r = 0.005, which is the 6% or 0.06 annual interest rate divided by 12 monthly payments per year
• n = 360, 12 monthly payments in a year times 30 years (loan term)

To solve for your monthly amortization payments, use the above formula, as follows:

150,000 / { [ ( 1 + 0.005 ) 360 ] – 1 } / [ 0.005 ( 1 + 0.005 ) 360 ] = $899.33

Based on our example, your monthly amortization payment should be $899.33. This is a good starting point to see if you can generate enough cash flow from your rental property investment to pay for your mortgage.

How to Know if a Multifamily Mortgage Is a Good Deal

Not all multifamily mortgages are created equal. That being said, you also need to consider several factors that can affect how you can qualify for a mortgage. For instance, most lenders prefer to approve borrowers who have a good credit history. If your credit is in good standing, you will most likely qualify for a loan with low down payment requirements and low interest rates. On the flip side, investors who have poor credit records may find it difficult to get approved for financing.

What to Consider When Shopping for the Best Multifamily Loan

The best multifamily mortgage is the one that offers the most favorable terms for you, as an investor and borrower. When shopping for multifamily financing, make sure to consider the following factors:

• Qualification requirements: What do you need to show to get approved for the loan? Can your credit score and experience as an investor qualify you for financing? Also, check the property and occupancy requirements (if there are any) to ensure that you’re getting the right loan for your specific purpose.

• Maximum loan amount: What is the maximum loan amount you can get from a particular mortgage type? You should also consider the maximum loan-to-value that the lender will provide. This way, you can make sure that you have enough cash for the down payment.

• Closing costs and other expenses: How much do you need to prepare for the closing costs? What are the other expenses that you need to spend? Some financing types and lenders require professional appraisal reports and certain types of insurance. These are additional costs that you need to be aware of and prepare for.

• Interest rates: The lower the interest rates, the better. Typically, borrowers who are in good credit standing have the privilege of getting the best rates from a lender. In contrast, those who have poor credit history are considered high-risk borrowers, so lenders tend to charge higher interest rates to mitigate the risk.

• Loan term: How long do you think you can repay the loan? For some investors, longer loan terms are better because it means that their monthly payments will be lower. However, other investors prefer shorter loan terms because they want to build equity on the property quickly and lower their interest expenses.

Why You Should Use a Mortgage Calculator 

To know if a multifamily mortgage is a good deal, you have to take a look at the cash on cash return of a particular multifamily rental property. The cash on cash return can tell you how much return you can earn relative to the amount of cash invested in a property. In general, cash on cash return of 8% or higher is considered a good deal. However, depending on the location of the income property, some investors consider cash on cash returns of at least 3% to be acceptable. 

However, calculating the cash on cash return while you also manually calculate your mortgage can be laborious and inefficient. That is why it’s recommended that you use an all-in-one mortgage calculator for multifamily properties to compute these essential figures. This can help determine whether a particular multifamily property will be a profitable investment or not. 

Mashvisor’s real estate investment calculator lets you calculate your mortgage based on your preferred loan terms and mortgage type. You will also see an overview of your rental income versus your expected monthly expenses, which include your monthly mortgage payments. Plus, it provides an automatic computation of your cap rate and cash on cash return so you can see if the property can generate enough cash flow.

With this kind of multifamily mortgage calculator, you can make an informed investment decision. 

Let Mashvisor help you find your best multifamily rental investment. Start your 7-day free trial now.