Are you ready to take your real estate game to the next level? If you have dabbled in single-family investments in the past, you may wonder what comes next. It is only a matter of time, then, before you find yourself researching how to buy an apartment complex as your next commercial rental project.
Buying an apartment building may seem daunting, but it can be a savvy investment, especially for real estate investors who already have some experience in purchasing rental properties. Read on to learn more about apartment complex finances.
Buying an apartment building can be an excellent way to start building wealth through real estate investing. However, coming up with the down payment to purchase a property outright is unrealistic for most beginners. That’s where getting a loan comes in With the right financing strategy, you can leverage debt to buy a larger apartment building than you could afford on your own
In this comprehensive guide we’ll walk through everything you need to know as a first-time apartment investor to get approved for a loan and choose the best financing option for your goals.
Overview of Apartment Building Loan Options
When looking for an apartment loan, you’ll generally have a few main options:
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Banks: Your local bank may be willing to lend on an apartment building. However, bank loans often require 25-30% down and tend to have less favorable terms than other loan types.
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Agency Loans: Fannie Mae and Freddie Mac offer some of the best rates/terms for borrowers with good credit and net worth. Can get up to 80% LTV with long-term fixed rates.
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HUD Loans: Government insured loans from HUD offer the most favorable terms, including 85% LTV and very low fixed rates, but can be harder to qualify for.
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CMBS Loans: Offer by private lenders and investors, these loans provide low rates with easier qualifying standards, but less flexibility.
The right loan type for you depends on your financials, experience level, and investment strategy. Working with a good commercial mortgage broker can help you identify and find the ideal financing.
Step 1: Make Sure You Qualify for a Loan
While getting a mortgage for a single family home is tough, qualifying for an apartment loan can be even harder. Most lenders will want to see:
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Good credit score: Usually 660+, but requirements vary by lender.
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Sufficient net worth: Expect to need net worth equal to the loan amount.
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Down payment funds: Plan for 25-30% down minimum. Some loans like HUD offer lower down payments.
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Solid property financials: The property must have a debt coverage ratio (DCR) of at least 1.25x.
Work on improving your credit and financial position before applying if needed. Come to the table ready to show lenders you are a low risk.
Step 2: Find the Right Apartment Building
An important part of getting approved is finding the right property that lenders will want to finance. You’ll want to look for:
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Recent repairs/upgrades: Lenders don’t like deferred maintenance.
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Good location: Avoid high crime areas or struggling markets.
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Solid rental demand: At least 90% occupancy with market rate rents.
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Positive cash flow: Look for at least 8-10% cash on cash return.
Conduct thorough due diligence before making an offer to uncover any red flags upfront.
Step 3: Work with a Knowledgeable Mortgage Broker
A good commercial loan broker serves as your guide through the apartment financing process. Their expertise and lender relationships can help you:
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Get quotes from multiple lenders to find the best rate/terms.
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Navigate documentation and underwriting requirements.
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Identify the optimal loan program based on your goals.
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Secure approval for the maximum loan amount.
Brokers generally charge 0.5-2% of the loan amount, but can easily pay for themselves through the savings they provide.
Step 4: Gather Required Documentation
Lenders will require significant documentation on both you and the property during underwriting. Be prepared to provide:
On you:
- Tax returns for 2-3 years
- Bank/investment statements
- Debt schedule
- Resume
On the property:
- Rent roll with 12 months of history
- Operating statements for 2 years
- Lease agreements
- Appraisal
- Inspections (property condition, phase I environmental, etc.)
Work closely with your broker to ensure you submit a complete application upfront to expedite approval.
Step 5: Shop Your Deal to Multiple Lenders
Never go with the first loan quote you get. With your broker’s help, shop your deal to 3-5 different banks, agencies, and debt funds.
Compare factors like:
- Interest rates and fees
- Loan-to-value ratio (LTV)
- Debt service coverage ratio (DSCR) requirements
- Term lengths
- Prepayment penalties
Choose the lender providing the most favorable loan terms to maximize your leverage and returns.
Step 6: Close and Fund Your Apartment Loan
Once you get loan approval, it’s time to finalize the financing. Be prepared for an intensive closing process with stacks of legal documents to sign.
You’ll need funds available for closing costs like:
- Lender origination fees
- Third-party reports
- Title insurance and escrow fees
- Any mortgage recording taxes
Finally, the loan will fund, allowing you to take ownership of your new investment!
Key Tips for Securing Apartment Financing
Follow these best practices when applying for your first apartment building loan:
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Build your credit – Lenders want to see scores above 700. Pay down debts and dispute any errors.
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Grow your reserves – Have at least 6 months of liquid assets to cover emergencies.
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Be conservative – Don’t push for maximum leverage your first deal. Start slow.
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Document everything – Have records to validate all financials, ownership, operations, etc.
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Work with a pro – An experienced broker can make the financing process 10x easier.
With the right preparation and guidance, you can secure loan approval to start your apartment investing journey. Just take it step-by-step.
Frequently Asked Questions
How much down payment is needed?
Expect to put at least 25-30% down. Some loans like FHA may go as low as 15%. More experienced investors may get by with 20% down.
What credit score is needed?
Aim for a score of 700+ when applying for apartment financing. Many lenders have a hard cutoff at 660. The higher your score, the better.
Should I get a fixed or adjustable rate loan?
Fixed rate loans are preferable for long-term, buy-and-hold deals. ARMs can make sense for shorter term plays if exiting before any rate adjustments.
Are apartment loans recourse or non-recourse?
Most multifamily loans are non-recourse, meaning the lender can only take the property if you default. But many have “bad boy” clauses that make the loan fully recourse if you commit fraud or other acts.
How long does it take to close an apartment loan?
Expect 45-90 days from offer acceptance to closing once you have a fully executed purchase agreement. Quicker closings are sometimes possible for all-cash buyers.
Finances to Consider When Looking at Properties
As you begin to look at various commercial properties, there are several financial factors to keep in mind.
- Rent rolls. This document will help you identify future cash flow issues based on your tenant history. It details the present rent amounts for each unit and the number of beds and baths. It also contains information on the current tenants’ names, each lease’s terms, and the security deposit amounts.
- Occupancy rates. This calculation shows how much of your time is occupied with rent-paying tenants. It also helps to contextualize the cost of maintenance, which typically accounts for 40% of the income generated from rent and other sources.
- Vacancy rates. Lenders, appraisers, and underwriters use this calculation to assess the effective rents (gross potential income less vacancy).
- Depending on market conditions, asset class, and other factors, one could expect 5-15%.
Advantages of Buying an Apartment Complex
An apartment complex is a multifamily property with five or more units. Buying an apartment complex is a big decision, but it has several advantages over a duplex or similar residential property.
Apartment complexes are costly, but they reduce risk and increase profit potential because of their many units. Unlike the owner of single-family homes, apartment owners will still have rental income from other building units if a tenant moves out.
- Ability to protect your revenue stream by having a larger tenant mix.
- Stagger lease agreement start-dates to manage your rent roll/property management (i.e., you don’t want all unit’s lease to mature at the same time).