Multifamily Financing Tips

Apartment buildings are hot today.  As a matter of fact those who own them benefit from this real estate bear market.  If you wonder how’s that, just reckon of the millions of homeowners whose properties have been foreclosed or were forced to small sale their homes.  These folks are now renting, they can’t qualify to buy another house, at least not for a few years.  In the meantime, banks are in no rush to dispose of the recently foreclosed homes as the government has helped them eliminate their losses (through bailouts).  While these homes are sitting vacant for months, if not years, the apartments are getting full and more demand is thus made.

Before rushing in to look for apartment buildings be sure to learn what it takes to qualify for a mortgage nowadays.  Skin in the game is a must, there are no 100% loan programs available today no matter what the internet says.  Financial strength is also required, the lender must feel comfortable that you’ll have sufficient reserves/net worth to cover for the mortgage payments should high vacancy occur or major repairs must be made.  And last but not least, it’s the background in owning and managing apartment buildings.  Owning and managing residential properties is not sufficient experience, yes both are real estate but completely different breeds.  For more details on how to position yourself first in line for financing read Reality vs Fantasy in Commercial Financing.

As far as apartment building loan programs there are a few that most seasoned owners/investors are currently taking advantage of.  For example, there is a Multifamily Small Loan Program that  streamlines the entire loan process for multifamily acquisition and refinancing for loans between $ 1 million to $ 3 million ($ 5 million in major MSAs).  Why is this loan so cool?  First of all because once you have it you won’t need to refinance after a few years.  You see, most bank loans have terms of three, five, seven or ten years (with balloon payments and longer amortizations), after which owners simply are forced to refinance.  Not with this loan!  You get a low rate and save money – and equity – by not having to refinance in the future.

Does it appear too excellent to be right?  No, not really, because as mentioned earlier a substantial down payment (if buy) or equity (if refinancing) is required.

Expect an average of 70 to 80% LTV (Loan to Value) with no exceptions above this limit.  Expect to provide evidence of previous multifamily ownership and a solid PFS (Personal Financial Statement).  If you’re half way there here is an thought.  Find a trustworthy partner with whom to join forces, and remember the word “trustworthy”.

When it comes to rates while they are low they won’t be as low as residential rates.  But, the lower the LTV the better the rate.  For example a loan with a forty percent equity and a higher debt service ratio will benefit in form of lower rates due to its lower risk. (For a rate quote please contact me).  The other difference is that residential loans today tend to come with no prepayment penalties while many commercial loans do.  So what should a borrower expect?  Up to five years with a penalty determined when the loan is underwritten.  Yet, this should not be considered a huge detriment unless you plot on selling the property during the next few years.  This loan program is best used for those plotting on holding on to the property in longer term (more than five years) otherwise, there are better programs for small-term investors.

Properties best suited for this program are those in excellent to fantastic condition and with high occupancy rates of 90% or above.  I see plenty of requests out there for distressed multifamily properties and yes, there are fantastic opportunities in buying and stabilizing such properties.  And hard money or private money may be the temporary solution.  After the property is fully stabilized it may then qualify for the Multifamily Small Loan Program.

Please try to forget the guidelines from the past decade.  Forget the no down payment or small down payment programs.  Forget the stated income, no income and no documentation programs.  They are fantasy, unrealistic, time-wasting thoughts.  They are gone and not coming back for a long time.  Seasoned investors know this and that’s why they work rather efficiently when they are in need of financing.  Their goal is a successful closing and they know what it takes to get there…a  viable project and a viable borrower with more than enough proof to provide to the lender.

One last piece of advice.  If you’re looking to finance apartment buildings in Croatia or Australia or some other far-off land you won’t get funded by American lenders.  No matter how appealing your project is it won’t happen.  Why?  The problem is one of taxation.  If a foreign bank were to make a huge loan here in the states, the US government would levy a foreign lender tax of 30% of its interest income.  Conversely, an American lender doing a loan in another country would subject itself to a similar tax imposed by the foreign country (check with your tax adviser for more details).  There is one exception, but, and that is if an Australian bank starts a subsidiary bank here in the US and the subsidiary makes loans in the US.  Generally speaking, if you are seeking a loan in Croatia, save time and energy, and go local.