Lenders often like to lend on multi-family properties because these assets can serve as the right collateral for several reasons.
Multi-family properties, particularly in major metropolitan areas, definitely have their advantages when it comes to hard money collateral. They tend to yield stable rent rolls, and that means a steady income for the owner. Some properties may also qualify for tax breaks and concessions from municipalities, which sweetens the deal. Depending on the agreement between the borrower and the lender, equity or debt can also be part of the collateral used for the loan, which provides flexibility.
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Why do hard money loan lenders like multi-family properties? Let’s explore the reasons why:
With more than half of the world’s population already living in cities, according to the United Nations, multi-family housing is becoming the norm. Residents who move into these rental properties are remaining there longer than ever before. It is not uncommon in places like New York for these places to be home to multiple generations.
Owners can count on these properties producing steady streams of revenue for a long time, too, which makes it easier to service the debt on their loans. Hard money lenders find that consistency greatly appealing.
If a share of the collateral property is offered as part of the project, the lender can reap many tax benefits. Depending on how the deal is structured, the lender can derive advantages from standard property deductions and from any capital gains if the property is ever sold.
Every lending scenario is different, which affects what specific tax benefits will be in play. The deciding factor is how the hard money loan is structured. If debt or equity is part of the deal, then the lender can apply certain tax benefits that aren't available to cash investors. But it has to make financial sense for the hard money loan to work, so give it extra scrutiny before you decide to use this option.
As savvy investor Kevin O'Leary says on the TV show, "Shark Tank," reliable valuations are key to considering any investment, particularly in the investment banking and lending world. If there's no accurate valuation, then it's likely that the hard money loan won't be approved. In this scenario, multi-family properties offer an attractive option because the revenue they generate can be measured reliably. They also come with equity. That's why it's preferable to involve a neutral third party appraiser to produce a valuation that reflects comparable properties in the area because lender and borrower can be comfortable with the terms of the final offer.