Personal Finance, Loans & Insurance

If you are looking to obtain financing or a loan for your apartment building – there is critical information you must know about how to obtain an apartment loan before venturing out to get one.

Apartment loans on income producing property are generally available at 80% of the value of the property, or Loan To Value (LTV), or the largest amount dictated by the property’s Debt Service Conversion Ratio (DSCR). The DSCR is similar to the Debt-To-Income Ratio used to qualify a residential home loan. The DSCR determines whether, or not your apartment building will qualify for financing from the lender, or in other words, whether the income will cover the debt.

Properties in only “fair” or “poor” condition may not qualify for apartment loans or will require a larger down payment. Units you’re considering should be in generally good condition and have little deferred maintenance. You may even consider refinancing your current apartment loan to get a lower mortgage rate.

There are many types of financing programs available including: non-recourse loans, apartment mortgage loans, joint venture real estate, commercial equity loans, commercial rehab loans, and structured financing.

Banks, and lenders have different minimum and maximum loan amounts available for borrowing, along with a variety of loan programs for you to choose from, which you should carefully tailor to your specific needs, along with other specific needs such as repayment terms, interest only terms, pre-payment penalties, and the time required to close your loan.

Apartment loans require a lender, or broker experienced in multi family and commercial real estate financing. There are a wide variety of lending options for apartments; small apartment programs for multifamily transactions from $1 Million to $5 Million, mid-balance apartment programs for multifamily transactions from $5 Million to $25 Million, and large apartment programs for multifamily transactions from $2 Million to No Maximum.

Apartment loan carry backs are becoming increasingly popular in today’s environment, as nominal interest rates on apartment loans increase by comparison to the bargain financing available in recent years.

Programs are available on fixed and variable rate financing on 5 or more units as lenders want your apartment loan business and are willing to compete on apartment financing rates and terms to get it.

Of course, terms and rates vary and loan rates currently run as low as 5% while apartment building loan terms can run from 25 to 30 years fixed for apartment buildings and multi family real estate loans.

Apartment lenders all have different requirements for such things such as property type, presentation format, location and quality as well as the minimum and maximum apartment loan amounts they will consider.

Types of Apartment Lenders include: Fannie MAE, Freddie MAC, FHA/HUD and more. While services include in-house processing, underwriting, and the structuring of the most complex funding requests. Also, the right broker can get you access to private lenders, who also do various types of commercial, and apartment loans, including the more creative financing loans that you may need on a particular apartment acquisition.

Additionally, an experienced broker can protect you from the unscrupulous fake lenders out there, who ask you for a large up-front deposit, and then never approve your loan. Their sole business is collecting deposits, and then providing you with a false reason why they could not approve your loan. They then state that your deposit is non-refundable. By this time, it is almost impossible to retrieve your funds, and would be very costly to pursue litigation, which is what most fake lenders who do this are counting on.

However, with any legitimate bank or lender, you will need to provide a small deposit of usually not more than $3,500.00. This fee covers the appraisal which the lender will have to order, and the document processing of the loan, which can be very extensive, depending on the size of the apartment you are acquiring, and will usually be credited back towards your final closing cost.

It is also very important to make sure that you do your due diligence as it relates to your financial analysis on the property. Be sure to use the actual net operating income and expenses whenever they are available, as opposed to the projected net operating income and expenses, which is what some sellers will provide to you, in order to make the property appear more enticing to you the buyer.

Loan-to-value percentage rates on refinance and construction are usually in the 75%-90% range. Loan approval will be subject to property appraisal, title review and specific loan program financial requirements. Again, apartment buildings are most frequently financed at 80% of value or cost (whichever is lower) and may or may not require recourse (personal guarantee.

Remember, lenders need to loan you money in order for them to make money, so they are motivated to help you acquire your property. They will work with you to close your loan, but an experienced broker may be able to protect you from possible loss, save you money, and negotiate a better deal on your behalf due to his experience, and previous working relationships with the lenders he brings deals to, because of the volume he may bring to a specific lender. This is an important consideration as you decide to move forward.

In preparing for your new apartment building loan, here are the essential documents that you will need to provide to your lender or broker, in order for them to give you a pre-approval on your apartment loan.

1.) You will need to provide a completed loan application;
2.) You will need to provide a tri-merged credit report. (tri-merged means all 3 credit reporting agencies will be included on the credit report)
3.) You will need the most recent 2 years income and expenses on the apartment building you are looking to acquire; and
4.) You will need the rent roll. The rent roll is just a list of all the present tenants in the building, what units they occupy, and how much monthly rent they pay.

Armed with these documents, you’re ready to get your apartment loan pre-approval within 48 hrs. from the time you provide your broker, or lender with the above listed documents.

Good luck, and make sure you find a knowledgeable mortgage professional to work with you on your acquisition. This will save you time, money, and headaches. It could even keep you from making costly mistakes that could cause you to throw valuable money down the drain.

So, If you are looking to acquire apartment buildings to build your future wealth, and acquire financial freedom, there has never been a better time than now to get started. Take action and prosper!

Conventional loan options on apartment financing is currently much more scattered than in the past.   Previously rates, programs and loan to value, etc where very similar between competing lenders and banks.  Now however, with the issues on credit markets we are seeing wide differences in offered loans. 

For example, when we would shopped loans for our clients just a year ago, the difference in interest rates, from one source to the next would be maybe only 5% or so.  One bank may have quoted an effective rate of 5.95%, the next 6.1%.  Now it is not uncommon to see one source quote rates 100 basis points over the next, with wide differences in term, fixed period and even amortization schedule. 

The reasons here are complex and wide reaching.  For example, here in the Midwest, we had a prominent bank that did a lot of apartment financing, had their own status downgraded to “junk”, which had an immediate and negative impact onto their cost of capital and in turn what rates they could offer to borrowers.  

Apartment Financing Loans   

As far as what lenders want on a conventional basis for apartment financing, think clean and stable.  Most renovation loans are very difficult now.  Capital sources want to see current, actual occupancies levels at around 90% – 95%.  The building itself needs to be in good repair as well.  Lease “seasoning” is another unfortunate reality within apartment financing (meaning many lenders want to see that the tenant has been around and in good standing for 2 -3 months before they count that income.)

Debt coverage ratio on conventional are pretty much limited to 1.2, with many banks beginning to creep this up to 1.25 and we have seen a few traditional portfolio banks raise this up to 1.3.  Though they are probably just “cherry picking” and not funding a lot of loans.

Borrowers should also give very careful consideration to the validity of bank/lender.  The risk here is getting started with the bank, i.e. term sheet signed and good faith deposit sent in, only to have the bank pull out.  This is happening more and more (especially in other areas of the business like on owner occupied office building, industrial, etc.) and borrowers should try to protect themselves from this. 

Often the warning signs are obvious.  Have they reduced or eliminated parts of the country they will look at deals in?  Have they laid off many of their loan officers?  Have they tightened underwriting standards drastically?   Have they done all of this but it’s been spread out over months?  That’s a bad sign and they will likely make the next announcement that they are no longer considering loan request. 

Much of this info will be hard to get as the bank LO’s won’t want to reveal this to you.  The individual still wants your business as most of their pay is dependent on closings.  Working with, or getting recommendations from seasoned professionals, such as your CPA or a commercial mortgage broker can help you pick the right source.