How to Get Apartment Building Financing Even if You Don’t Qualify

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As I continue to hunt for a (bigger) apartment building deal, I am interviewing lenders and brokers to better understand their underwriting requirements.

This is critical if I want to successfully close deals I get under contract.

In this article I will share with you the most common underwriting requirements and terms you can expect from a commercial lender, and also how you can satisfy their lending requirements even if you don’t qualify  yourself.

Imagine a scenario where you did everything right: You found a good deal and put it under contract, maybe you raised some money from investors, you did the due diligence and are still happy with the deal.

Now, you start the loan process. Your lender requests your personal financial statement but then tells you don’t have the net worth and liquidity to get financing. 

Suddenly you realize you’re in trouble. While you pride yourself in the nest egg you’ve built up over the years, you also know that you don’t have the net worth to match the loan amount, and you certainly don’t have 9 months worth of liquidity in reserves.

Wouldn’t it have made sense to ask your lenders about their lending requirements before hand?

You betcha!

As I sat down with each loan broker/lender the last few weeks, I gave each one multiple scenarios and asked what they are likely to require to approve the loan and what the terms would be. What would the terms look like for a stabilized asset? What about one that is not? What would a bridge loan look like?

The answer will vary, of course, depending on the situation, deal size, and the lender you speak with. You won’t get any guarantees, but you will see patterns emerge that you can use as you put together the financing.

Here are some rules of thumb:

Debt Coverage Ratio

This is the ratio of your debt service payment to the net operating income. For a stable asset, the lender will look for at least 1.25 ratio. For a riskier project, the ratio may be higher. For more on Debt Coverage Ration, See Debt Service Coverage Ratio (DSC) – What it is and Why it Matters For You

Loan to Value

This is the ratio of the loan balance to the value of the asset. For a stabilized asset in good areas, banks will lend up to 80% of the value. I use 75% in my projections and even lower if the property is not stabilized.

Net Worth

Lenders are looking for a net worth of the sponsor (or sponsors) that equal the loan amount. If your personal net worth does not meet these requirements, partner with someone who’s willing to sign the note with you. Offer that partner some additional equity in the deal, or pay him a fee at closing.

Liquidity

Lenders like to see liquidity equivalent to 6 to 9 months of debt service payments. They typically don’t require you to keep this in a separate account, they just want to see that level of liquidity in the sponsors’ personal financial statement. If you have a partner signing the note with you, then the bank will also consider that person’s liquidity.

Personal Guarantees

Banks like personal guarantees. Loans that need to be personally guaranteed are also called “recourse”. This means that if you were to default, the bank could go after your personal assets.

You want to avoid personal guarantees in general, not only for yourself, but also for any investors you have involved in the deal. Your investors are typically “limited partners” with limited decision-making authority, and they’re not investing with you to take on any more liability than potentially losing their principal.

For loan amounts under $1M,  the banks generally will want a personal guarantee. Interestingly, the higher the loan amount, the more likely you will get a non-recourse loan (another reason to try to go BIG as soon as possible!).

You can negotiate personal guarantees  (and other terms of the note). For example, you might be able to “bleed off” the guarantee, which means that the amount of the guarantee decreases over the years.

Bridge loans normally require a personal guarantee but then can go away once the asset has been stabilized.

To me as a syndicator, I am mostly concerned about the recourse, net worth and liquidity requirements because my personal financial statement may not support the kind of asset ($3M – $5M) that I’m looking for now. This means I, too, will have to partner with someone to make up for this “shortcoming”.

Keep these key points in mind:

  • Partner! You don’t need to limit yourself to your own personal financial statement. If you’re “weak” there, partner! Find one of your investors who complements your net worth and liquidity requirements.
  • Go big as quickly as possible. I don’t want to have to personally guarantee a bunch of buildings – who does? Limit your personal liability as much as possible, negotiate the loan documents! Also shoot for bigger assets so that you get non-recourse loans.
  • Talk to your lenders EARLY, long before you have your deal under contract, so that you better understand their underwriting requirements. This allows you to get your ducks in a row ahead of time so that you can close on your deals.

As with most things in business, it’s all about relationships. Build a relationship with your lenders NOW so that when you really need them, they’ll come through for you.

What kind of things are you hearing from your lenders?

Comment below and let’s discuss!

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About Author

Michael Blank’s passion is being an entrepreneur and helping others become (better) entrepreneurs. His focus is buying apartment buildings by raising money from private individuals. He’s been investing in residential and multifamily real estate since 2005. He is the creator of the Syndicated Deal Analyzer and the eBook "The Secret to Raising Money to Buy Your First Apartment Building".

14 Comments

  1. Christopher McGuire on

    Loan to Value or Loan to Purchase Price? In my experience, if you get a property under contract that is worth $1,000,000 and you buy it for $800,000. the bank is going to you to give a percentage of the down payment from the $800,000, not the $1,000,000.

  2. Michael,

    Thanks for sharing your experience and insight. You covered a lot.

    I would add that a prospective borrower should take a hard and REALISTIC assessment of his/her own financial position BEFORE searching for a loan. That means having an up-to-date personal financial statement, most recent tax returns available and should know his/her credit score. An up-to-date resume of current and past properties is also helpful.

    The prospective borrower should ask himself/herself “would I lend money to this person?” and “why?”

    You are right about seeking partners to expand the investor’s reach.

    My equity investors, and yes, there are equity investors still looking to coninvest in deals – seek good deals and good general partners. They don’t waste much time on someone who does not have his/her information available and well organized.

    Prospective partners as well as lenders all scrutinize deals while asking “what happens if this deal fails?”

  3. Great article Michael! I’m working on a refinancing my first commercial project now actually. I definitely agree that talking to lenders in advance is very important! Having solid financial records to show them helps a lot too.

  4. Great article. Your points are accurate and I agree that you want to speak with your lenders ahead of time to survey the market.

    We are actually going through this right now. My partner who was going to sponsor our loan has 30+ years experience and over 200 units under ownership and 350+ units under management. We found out today the lender wanted to see more liquidity on the acquisition for a 48-unit property for $1.8mm. So we are talking with sponsors with a minimum of $1mm net worth and $200k in liquidity in return for equity or an up front fee to get the loan. I hope this works out because we will have $40,000 going hard in 2 days.

    -Swat

  5. Murphy Rivenbark on

    Hi; I have been interested in commerical for sometime however I do not have any funds close to down payments or proving net worth.
    Most of my experience over the past 30 years have been houses none of which I personally had to put up any money. All my financing came from personal or hard money investors that required no money up front as they were equity investors.

    Can a person like me get into the commerical such as apartments or self Storage?

    • Michael Blank

      Murphy, absolutely you can get into commercial. The best way to do that is by raising money from others. Since you’re already doing that to an extent with houses you already have some experience. Don’t expect the majority of your house investors to go along with you to commerial, but some will. And the others will refer you, so follow up with them.

      I’ve written extensively about raising money for apartment building investing here on Bigger Pockets as well as my own blog, check out all of the BP articles here: http://www.biggerpockets.com/renewsblog/author/michaelblank/

      Hope that helps!

      Michael

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