Like single family homes, condominium units tend to be owner-occupied. Financing for these units therefore tends to follow traditional guidelines and requirements centered on owner occupancy. But what happens when a condo unit is held as an income-producing investment? Is financing still available? The short answer is yes but some further explanation of the process may be helpful.
Availability of Financing
Investor units generally fall into two groups: single units and blocks of units. According to Ryan Skaggs, a loan originator with Wintrust Mortgage, a residential lender based in Rosemont, Illinois, individual condo units which are held for investment are financeable at terms similar to owner-occupied units. “Rates for investment properties typically are slightly higher than an owner-occupied purchase.
Most underwriting guidelines require 20% down, but in order to get the best terms for an investment property purchase, lending pros generally recommend 25%. Conversely, if purchasing an owner-occupied unit, a buyer could purchase the property with as little as 3% down taking advantage of conventional financing.”
“FNMA [‘Fannie Mae’] loans are available for investment properties,” says Skaggs, “but in this region they must be below $417,000 and underwritten to specific guidelines. Loans over $417,000 are considered ‘jumbo’ loans and require different criteria.”
Barry Korn, a mortgage banker with The Federal Savings Bank, which has locations in Illinois, concurs. The financing process for these types of investments “is similar to that of an owner-occupied unit,” he says. “Purchases are straightforward in that you have standard criteria relative to loan-to-value (LTV), debt-to- income, and housing expense ratios. With respect to financing an investment condo, there are additional considerations relative to the ability of the borrower in the event of difficulties.”
Korn says that in his experience, while the basic structure is similar to conventional financing, “The LTV ratio of up to 75 percent is available, but the cash flow from the investment condo often limits the funding. Rates are slightly higher for investment condos compared to loans for primary residences. Currently, you are typically looking at 30-year self-liquidating loans.”
Asked about the difference between financing a single investor unit and a block of units, Skaggs explains, “For a residential mortgage to be sold to into the secondary market, the transaction would only allow for a single unit transaction. Block sales are still popular but in most cases require cash or a commercial banking relationship already solidified.” So what is an investor to do? Take a portfolio loan.
Portfolio Loans and Multiple Unit Purchases
A portfolio loan is a mortgage provided by a bank, but not sold into the secondary market. Rather, it is held in the bank’s portfolio as a balance sheet asset. The terms for portfolio loans available for investor condo units—whether as a single unit or blocks of units -- are somewhat less advantageous than Fannie Mae loans. “If a borrower has an existing relationship with a bank, the terms may be more advantageous for a portfolio loan,” said Skaggs. “A personal guarantee may be required especially for a new investor.”
Gail Lissner, a vice president of Appraisal Research Counselors based in Chicago describes the unique circumstances of the investor condo market in the Windy City. For the most part, “People buy as owners/users in Chicago. There are investor-owned units from the prior cycles, but there is little investor activity going on in newly-built units. The Downtown market is back to pre-recession levels, and development activity is starting to ramp up. The resale market is fine.”
Korn says that in the Chicago area with respect to refinance, “There is a question as to whether the investor is looking just to refinance, or to refinance and take cash out, which will have an impact on rate.” Skaggs, who says investor loans represent around 30% of his own business, adds that
“Refinance transactions are typically a more streamlined process as there are no sellers, contracts, timelines associate with them.”
When it comes to blocks of units, Korn adds, “Financing a block of units takes the transaction into commercial territory. Financing a single unit, while for investment, and therefore a commercial transaction, is still evaluated as a quasi-residential (think consumer) transaction. A block of units requires a much more complicated analysis, both of the units and the investor.”
Choosing Professionals, Watching Market Conditions
As with any major purchase or financial move, choose a mortgage professional who is well-acquainted with your needs as a condominium owner or purchaser. Not all mortgage professionals are the same; some specialize in single-family homes, and some in condos. Too often, purchasers choose a lender whose expertise lies in making loans for single-family homes, and who may not know the differences in processing loans in a multifamily context. They might treat a condo loan like a single-family home loan and three weeks into the application get a denial because of unfamiliarity with the documents required by the lender.
As mentioned above, the market for condominiums in Chicago has finally reached a state of equilibrium after the downturn associated with the great recession. According to Chicagobusiness.com, there were approximately 4,700 new rental units built between 2014-2015 as compared to 381 condo and townhome units for the same period. The market was overwhelmed by approximately 6,000 units backlogged from the boom years before the recession. That margin reduced to approximately 380 by mid-2014. Meanwhile going forward, developers have announced approximately 1,700 for-sale units to be built this year. That’s bright news for both Chicago’s condo market and the condo financing market.
According to Skaggs, “Financing for investment properties has expanded to allow more buyers more options in the past years, due to the loosening of restrictions put in in place post financial crisis, though restrictions have been lifted we are still nowhere near the careless market that we saw in the mid-2000s. I expect the market to continue to expand as home prices have continued to appreciate in the market. In the Chicago metro market, companies have continued to move their offices downtown, which has increased our buyer pool for not just owner-occupied buyers, but those landlords looking to cashing in on the influx of those transplanted new employees looking to rent.” Additionally, “we have seen a huge influx of developers and landlords buying up units in particular neighborhoods that are transitioning faster than the overall Chicago metro market.”
Skaggs adds that there is “no significant difference in financing between city and suburbs. It all depends on the specific neighborhood within the city or the particular suburb; some have seen huge appreciation and thus increased rents, which has attracted significant investment into rental properties. Take Logan Square or Fulton Market; these neighborhoods are outpacing the overall market over the past few years.”
Korn sees things proceeding positively in the Chicago market as well. “As the saying about real estate goes; location, location, location. There will be many areas that improve, especially as the Chicago market overall continues to improve.”
The good news is that unlike in the past, financing is available for investor condo units. The investment decision no longer must hinge on an all cash purchase if the investor desires leverage. But that investor decision must take into account the various factors at play in individual markets.
A.J. Sidransky is a novelist and staff writer for The Chicagoland Cooperator and other publications.