First deal. 22 unit apartment. Will lenders even say hello to me?

12 Replies

A guy bought a 22 unit class D apartment several months ago in a class C area from absentee owners. He's done the heavy lifting: evicted half the tenants, rehabbed 3/4 of the building, raised rent from 400 to 520, and signed new contracts and filled the building. 

He paid 400k for the place and is wanting to flip it for 700k. I believe he bought from the previous owners with seller financing.

I asked him for tax returns, profit and loss statements, rent rolls etc. All he could give me were utility bills and gross rents. Since he's only owned the property a few months, it's understandable that he wouldn't have much in records yet, and apparently the previous owners didn't provide him with any records either.

How would I approach any lender with just some pro forma estimates from the seller? Since he bought it with seller financing, all those documents weren't required to do the deal.

Idk if this guy is just hoping for a cash buyer or what... 

@Andrew Scott  

1. Is the building worth buying at 700k?  This might make this a short discussion.

2. Do you have 30% to put down? The "standard" method of financing something like this would be with a commercial loan.  Terms usually look like 30% down, 6% rate, 20 year amortization.  

3. You mentioned that 3/4 of the building was rehabbed.  How much is left and are any of the big ticket (roof, HVAC, plumbing) left in that 1/4 unfinished?  How much more money is this part going to cost you?

I assume if you have the 30% down, a few months of rent rolls and a good idea of the operating costs that most lenders will talk to you.  @Joel Owens can give you a commercial pro's insight into the exacting details here.

Can you assume the note?  He might be happy to have his costs covered and put 50-75k in his pocket.  That might be cheaper for you than 30% down.

Completely agree with Aaron.  If he has seller financing, why give that up, just assume the note and you both win.  He makes some money for his work and you get financing without the hassle of finding another lender.

I'll post though I am no expert.  I've been shopping for a similar deal myself and looking for financing.

I've talked to several lenders and what I'm told is that commercial lenders (more than fourplex) look more at the deal than the borrower - although borrowers still matter.  So If you have a deal which would cash flow at 4% or so and sufficient reserves, they will look at it.  I'm finding mainly 70% loans, although lenders have told me that a seller could carry back part of the 30% but as the loan gets riskier, they want to see a better deal on the property - which you should too.

I had the best luck with smaller local banks and credit unions.

Obviously, he could provide you with copies of leases and bank records so far.  For what it is worth, the numbers look goo to me, but buying a lower level 22 unit is jumping in at the deep end in my opinion.  I would want to get some experienced help. 

Thanks for the info. 

The 3/4 rehab is all that was needed. The roof is 3 years old.

The operating costs are 30k/yr not including reserves for big ticket items and vacancy. 30k includes water sewer trash, taxes, insurance, and about 5,000 extra for misc.

Obviously, calculating things using his numbers paints a very pretty picture. However, Using the 50% rule provides a pretty picture as well.

The 20 year amortization. Is that for a 20 year term or a balloon payment at some point?

I have two partners that are interested. Together we'd have enough to pay cash for the asking price. I'd love to get it financed though. 

Assuming the note is not something I had thought of. Although, I don't think he'd go for it. He mentioned wanting to sell this place in order to buy one in his home town. He drives 2hrs to manage this one himself. But I'll definitely inquire.

Few months of time isn't enough to show seasoning and stabilization of this property. Just as easy as it went up it can go down maybe even more in vacancy from the time he bought it.

Not going to get a loan putting 25 to 30% down on an asset like that. Likely the seller will need an all cash buyer or one with some to put down and finance the note on the rest. I like to see trailing 12 to 24 months of being turned around with occupancy and income. If they can't provide that it's a no go.

If we paid cash, how long would we need to operate it before eligible to cash out refi?

I have an investment in a mini storage that we had to refi two years ago.  The lender looked at the previous five years operating numbers.  Weak numbers in the first two years of that five year period reduced their appraisal of the property and required we do a cash-in refi.  That wouldn't apply if you're buying for cash, but you may have a hard time showing a new, higher value for quite some time.

On almost all Multifamily including turn arounds the general rule to obtain financing is showing 90% occupancy for 90 days. After that you'll be able to get permanent financing. Less than that and you're looming for a bridge loan. Lenders will always try to ask for more especially if they don't like other parts of the deal but once you hit 90 for 90 you're in the range where lenders will consider it regardless of seasoning.

For cash out 90 for 90 is also possible but is has to be a good story (good market or location or strong borrower) otherwise add another couple of quarters.

In regards to Andrews question if you pay all cash you'll be able to refi for what you paid into it including rehab almost immediately. If you want cash out above your costs then go by the requirements I laid out above.

Originally posted by @Derek Carroll:

In regards to Andrews question if you pay all cash you'll be able to refi for what you paid into it including rehab almost immediately. If you want cash out above your costs then go by the requirements I laid out above.

 Thanks for the help.

It seems strange that banks wouldn't do a purchase loan under current circumstances, yet they'd do a refi almost immediately. Just the way things are?

@Andrew Scott I'd actually expect that you could find a lender willing to do the acquisition as well. Should be able to get 70% loan to purchase price assuming the cash flow covers debt at a 1.25 ratio.

I don't know the banks in your area so I can't make any intros for you but if you want some more help I can give you some general ideas and tips to use when approaching lenders, negotiating with them, or reviewing their offers.

@Derek Carroll Thanks. I'll pm you. 

Napkin math here. Assuming I could get a comparable loan to what @Aaron Montague mentioned, 

  • 700k purchase price
  • 20 year amortization
  • 6% rate 
  • 30% down=210k
  • 490k financed
  • 42k in yearly payments
  • Gross rents 137k
  • sellers reported expenses= 30k
  • 50% rule expenses= 68k


The owner has had the property for 9 months. Hopefully, he's kept good records.

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