Small Business Guide to Apartment Building Financing: 7 Things You Need to Know

Are you a small business owner considering apartment building financing? Check out these 7 things you need to know before you start. The apartment rental industry in the United States grew about 2.4 percent during the last 5 years. This growth boosted industry revenue to 154 billion dollars in 2018. It doesn’t look like this apartment rental trend will stop anytime soon.

Are you considering buying an apartment complex? Maybe you found the right property but, don’t know how to finance your purchase. You might think it’s more complex than buying a single family home. It really isn’t. It will come down to having all the must-know facts about apartment building financing before getting your feet wet. Not sure where to start?

Looking for a building loan?

We have you covered. Here are 7 must-know facts about multi-family property financing you must know before contacting your lender.

1. Your Property Must Have 5 or More Units for Building Loan Eligibility

If you are considering purchasing a duplex or building less than 5 apartments, you should think about it twice. Because your property won’t be eligible for apartment loans. It’s recommended you take a step back and take a look at other properties if you are counting on getting a building loan. Sometimes small business owners consider buying a duplex or a smaller building because they want to purchase the property by themselves. Yet, many times bringing on board an investor may be the best move. Look for a partner with experience in the apartment rental industry. It will help you minimize your risk and improve your chances of getting your apartment complex loan approved.

2. Your Vacancy Rate Will Influence Your Loan Terms

In contrast with other loans, lenders take your vacancy rate into consideration to approve your loan. Are the units vacant? What is your vacancy rate? Do you have tenants under contract? How many new tenants are moving in? These are some of the questions your underwriter may ask. If your building has a high vacancy rate, your lender may offer you short-term financing at a variable rate. You could later replace this loan with long-term financing once the vacancy rate decreases. Your lender may provide more information about your financing options for apartment complexes with high vacancy rates.

Vacancy rates affect building loan approval and interest rates

3. Terms for Building Loans Can Range from 6 Months to 30 Years

The typical loan terms for apartment financing range from 5 to 30 years. If your lender offers short-term financing, your loan term may range between 6 to 36 months. These terms aren’t set in stone. They may vary depending on factors such as your lender, the market, property, finances, among other details.

4. There Are Three Types of Apartment Building Financing You May Qualify for

The three most common loans for apartment buildings are Government-Backed, Short-term, and Bank Balance Sheet loans. The terms and conditions on these loans vary even though all of them finance the same type of property:

  • Fannie Mae, Freddie Mac, and FHA provide all government-backed apartment loans. The typical loan amounts for their programs range from 750,000 to 6 million dollars. Depending on your finances and the property, they may finance up to 87 percent of the apartment building purchasing price.
  • Financial institutions also offer short-term loans. The loan amounts start at $100,000 dollars and go up to the limit established by the lender. Your lender may offer up to 90 percent of the loan to value depending on your finances and property.
  • Lenders offer bank balance sheet loans to keep them in their loan portfolio. Your financial institution may offer an apartment complex loan from $500,000 dollars and up to their highest limit. You may be eligible for a bank balance sheet loan of up to 80 percent of the loan to value ratio.

3 types of building loans to get the keys in your hands.

5. Lenders Ask for a down Payment on All Apartment Building Loans

In contrast with other types of property financing, all apartment complex loans require a down payment on the property. The percentage varies depending on your lender, the type of loan, property, and finances:

  • Short-term loans require you put down 10 to 25 percent of the apartment building purchasing price.
  • The typical down payment requirement on bank balance sheet loans is at least 20 percent of the property purchasing price.
  • If you take a government-backed apartment building loan, your down payment requirement will vary depending on the agency.
  • Loans offered by Fannie Mae and Freddie Mac demand a down payment of at least 20 percent of the purchasing value. In contrast, FHA may ask for 13 percent or more as your down payment.

6. Financial Institutions Base Your Approval on the Building’s Financial Performance

When you finance a single family home for investing, the bank will use your personal finances for approval. Instead, apartment financing approval depends on your building performance.

Financial institutions take a look at the market value and income of the apartment complex. Is the building located in a high demand area? How much income is the property generating? The underwriter will use this information to assess the risk of financing your property.

Before purchasing your building, you should consider taking a look at the Profit & Loss (P&L) statement for the property. These numbers can give you a better idea of where you stand when it comes to the building’s performance.

7. Your Underwriting Metrics May Change Depending on Your Lender, Finances and Commercial Occupancy

The underwriting metrics on apartment loans may vary on a lender basis. Underwriters use different metrics according to the type of loan and your finances. An example is how you may be eligible for a lower interest rate depending on your credit score and cash flow.

Today, it’s typical for apartment buildings to be mixed-use properties. Are there any stores in your apartment complexes? If so, what is the commercial to residential space ratio? You may not be eligible for certain loans if your underwriter determines your ratio is 50-50 or more commercial than residential. They may ask you to take a commercial loan instead of a multifamily loan.

Should You Consider a Building Loan?

Yes, you should consider getting apartment building financing to purchase your apartment complex. Taking an apartment complex loan is easier than you think. Before applying, you must do your research. What loan is your best option? It’s recommended to shop around to find the best lender for your property. Also, you should take a look at your finances and boost your cash flow if necessary.

If you are short on cash to make your down payment, you should consider bringing a partner on board. Keep in mind that your eligibility and loan terms will depend on your finances and property.

Want to make sure you are buying the right apartment complex? Not sure what you should look for in your investment property? Read our article to learn more today.