January 19th, 2025 Seismic shift in Multifamily Lending – what you need to know…
Hi everyone and thank you for following this blog and I am certainly not having any issue finding real estate topics these days.
First off, I want to announce the conditional sale of Chaben Place – the 24 suite project in Saskatoon. If you are interested to learn more about this deal, click HERE.
Today I want to touch on lending, which all things considered would hands down be the most dramatically changing dynamic in apartment building investing in the last couple of years.
In fact, lending has changed so much it has literally chosen winners and losers in terms of apartment location, size, and most important PRICE. Before I roll out the buyer beware (or seller you should know) scenarios, I want to walk though a brief history in multifamily lending as it was 25 years ago, basically until the pandemic.
There were generally 3 types of loans you would get, conventional, CMHC, or Bridge. Conventional, or non-insured, was my go-to strategy when I purchased most of my projects. It was safe, provided maximum flexibility, it was fast, and my JV partners did not have to sign guarantees. Bridge loans were short term interest only loans, often with rates 15% or higher that investors would utilize to stabilize/renovate the project before replacing the bridge with a long term CMHC mortgage. CMHC loans are insured, which enabled investors to borrow up to 85% of the purchase price for higher leverage, and lower rates than conventional loans.
In other words, investors had plenty of tools at their disposal, and there was plenty of competition in the multifamily lending universe.
I have found the lending industry to be incredibly fickle. What lenders are willing to do one month, can change on a dime regardless of your situation or history. In other words, there is no such thing as loyalty when it comes to multifamily lending. The best advice I can provide is to find a quality mortgage broker who can keep you up to speed on the merry go round of commercial finance so you can focus on acquiring quality assets.
A few years ago, I had a very large conventional loan that I intended to renew. I was shocked to learn that the lender was not interested in renewing my $2M loan and was only interested in doing loans $5M or higher. I thought this was a one off but this pattern continued as my conventional loans came up.
Another example, I had another 3 loans from the same lender, who simply refused to renew any of their loans even though they had offered a 25-year amortization, simply dug in their heels and refused to go past 5 years. What the heck was going on here?
Then came MLI Select, the ultimate investor trap invention from CMHC. The result has been chaos for investors to say the least with most multifamily lenders nearly solely focused on this one product. I asked one broker why he was doing these deals, and he said it was because he wanted to stay in business – even though he thought the product was as bad as I did.
So, what’s the deal today? Essentially the cash pool for 6 to 15 suite buildings has disappeared and lenders are not interested in doing any deals under $2M. Where these funds used to be plentiful, this pool has completely dried up and you will end up going to the Credit Union or ATB, most likely with a shorter amortization and higher interest rate – Hence, on a 12 suiter you need to purchase it at a good price. You will most likely have to buy a 20+ suiter with an entry level loan of $2M to even get in the game these days. The good news is that lenders are fickle, and they will most likely come around once they have pissed off enough customers and change their policies once again. The suite spot is in the 20 to 35 suite range where you can get the best combination of scale, price, and lending terms. Anything higher than 50 suites the competition picks up (pension funds, REITS, etc.) and smaller lending becomes tough.
So, remember this:
- Lender loyalty does not exist so treat this relationship accordingly.
- Find a solid mortgage broker and treat them like gold.
- Start your loan search long in advance of needing the money.
- Underwrite your deals with at 2% over existing rates to be on the safe side.
- The ‘best’ deals will be in the 20 to 35 suiter range – look there!
Each deal is unique and involves individual underwriting, but lending has become the ‘make or break’ ingredient to commercial real estate these days. With these changes in mind, always be on the lookout for opportunities, as they are out there if you dig.
What do you think? Do you think it will get easier or harder to borrow money for apartment buildings in the coming years?