116 Unit Apartment Complex Financing Question

18 Replies

We are looking at a 116 unit apartment complex. The asking price is $4,950,000. The NOI is $484,000/yr. The seller will carry a 20% second. With 100% financing we should cashflow about $13,500 a month. That is calculated with a loan at 5% with 30 year amortization.

Here's my question: Are there commercial loans that have a 30 year amortization? We are currently doing single family loans with a portfolio lender and we were told that 20 year amortization was their maximum amortization length for commercial loans (they consider any investment property loan a commercial loan). What are the current standard lending guidelines in the multifamily arena? Thanks in advance!

You won't get 30 year fixed, fully amortized for commercial.  But you may find a lender who will do 30 year amortization with a balloon.   I spoke to a local lender a few months ago who offered 30 year amortization with three, five, seven or 10 year balloons.  Rates were higher for the longer balloons.

Getting over $M in a portfolio loan is more about the collective financing aspects than falling into a loan program. Jon is right that, an individual investor, or small business owner won't come close to fixed rate loans with a 30 year amortization.

Principal reduction reduces lender's risks, there are also interest rate risk considerations, loan concentrations to one borrower and within a loan category pose risk concerns. The age and condition of the collateral can be an issue, the perception of management as well as the market.

Lender's must ensure that there is sufficient cash flow to an owner, if there isn't, the probability of a borrower bailing out goes up, OTH, the owner's cash flow beyond a level that keeps the borrower in the game isn't the goal of any lender. It's more like a partnership where principal reduction is required as if you were paying out profits, the lender will always want to limit involvement over a long term, there isn't any reason to prolong the aspects of higher front end risks for the rate charged, especially at current rates.

And, your lender will probably be local at that amount and I'd doubt one would vary much from another. Another thing at that amount, in the backroom of a bank, they may shift that loan to a participating lender, where another bank takes a chunk of that loan to reduce risks between the two lenders. Getting different terms becomes twice as difficult on the street. You'll have the "lead lender" who services the loan and appears to hold the whole loan, but half could be on a participation with another lender, this can also happen after the fact, never know. Loans need to be marketable in some respect as part might be shared later on as well, so getting a lender that varies from the norm really places constraints on future options in portfolio management. 

We have a similar loan at a 20 year am, adjustable rate on commercial in Texas, that's pretty standard in the game I'd say. :)  

FHA has a 40 year am, 40 year fixed, 80% LTV. I got mine at 4.5%

I know, sounds too good to be true. I thought so too.

Works best for refi because it takes about 6 months to underwrite.

No discussion of specific lenders in this forum, please.  That has to go into the Marketplace.

Originally posted by @Matt Skinner :

FHA has a 40 year am, 40 year fixed, 80% LTV. I got mine at 4.5%

I know, sounds too good to be true. I thought so too.

Works best for refi because it takes about 6 months to underwrite.

Range of the loan amount, please? Which program?

Your market will also have a lot to do with that I'd think too :)

So my post was edited for advertising (above).  

And I appreciate the spirit of the rule and i would just say that I have no dog in that hunt.  I am not affiliated with any lender or anything like that.  Was just trying to help Jerry out.

There are some pretty cool loan programs for apartments right now because the gov't wants investors to invest in them.  

If you go down the FHA/HUD road, please learn in advance about the annual auditing requirements, 1-3 year recurring REAC inspections, 1-3 year recurring Management and Occupancy Reviews, etc that will be imposed on you. These requirements cost you money and depending on the subjectiveness of certain inspectors, it can open up some really expensive cans of worms on your site. If you are not buying a newly built complex, plan on putting up hefty reserves up front and fighting to get that money back once you complete required work. Once all of these costs are considered, these loans are not nearly as attractive.

Fannie Mae has some some loan programs for sizes between $3-5mm, can be processed quickly if you go through a DUS lender and the rates are still attractive. Plus you can get 30 year amortization in a lot of cases.  The hardest part in the proposed scenario would be getting them to approve this loan with a 2nd and no skin in the game from the principal investor.  There are a lot of options out there besides the bank loan, you just have to hunt for them sometimes.

Yeah in a competitive market loans that take more than 60 days to close don't fly on bigger properties.

Sellers usually have time sensitive reasons to sell in  a lot of cases. Not all but a majority which is why they placed on the market in the first place.

If my property was locked for 6 months I would want a ton of money upfront non-refundable. If the buyer was planning on 100% finance I wouldn't even be speaking to them. Again if they want to put up 500,000 non-refundable for any reason  held by my attorney then great go for any type of financing and timeline you want. If it doesn't close the cash flow keeps coming and I made an extra 500k.

The larger properties you usually have very sophisticated sellers that simply do not go for this type of stuff. It always amazes me buyers want all the upside and cash flow but  none of the responsibility. Now if you have millions in equity with other properties you want to put up as collateral then that is different.

Most commercial lenders I know want liquidity and some skin in the game in case an "event" happens with the property that requires a serious injection of cash flow to keep it stabilized.  

Be aware of the fact that you expenses could be higher than you expect.  That positive cashflow projection can easily turn into a negative nightmare.  Once a negative starts and you don't have the cash to rectify, the situation can turn into a vortex with a flushing sound.

What are some ways to get a fannie mae or conduit loan approved for a first time buyer of large multifamily (for a stable cash-flow buy and hold)? Regardless of ALL the property considerations (I know what they are), I've been told recently by a mortgage brokerage that I still need a guarantor who has direct & relevant experience / track record. If this is true, how does one make a foray into large multifamily (say 1.5-3.5m) without having to settle for a recourse bank loan? 

Originally posted by @Steve Olafson :

Be aware of the fact that you expenses could be higher than you expect.  That positive cashflow projection can easily turn into a negative nightmare.  Once a negative starts and you don't have the cash to rectify, the situation can turn into a vortex with a flushing sound.

Yep that sums up the fears nicely. What do you think are the most common things well-meaning investors miss? here is my list of conservative requirements to avoid the flushing sound:

• Make sure T12-T24 actuals are showing numbers that will equate to = or > 12% cash and cash, considering 75/25 LTV, 30 yr am and 4.5%, no i/o assumed, i/o being gravy. Ideally 80/20 LTV, lower rate, 2-5 yr i/o, but again, cushion. Set walkaway price assuming worst case scenario with lending, since I'm a first time buyer.

• Make sure rent roll is accurate going back 2 years. 

• Make sure prop has PM in place who has been effective and can & will stay on after sale. Same ideally with maintenance. 

• Look for garden style, traditional mf, 75 units+ (for economies of scale and to justify dedicated onsite mgmt on payroll). 

• If stick built, keep build date after 1970. 

• Obviously inspect, make sure wiring, pipes and roof are up to date and won't cause probe down the road, or have remediated prior to sale

• Avoid props that serve one market, such as military, university, or one local plant that could shut down

• Avoid major markets, opt for submarkets with working class tenants.

• Avoid rent rolls that have MTM tenant ratio higher than 10%; make sure tenants are of decent quality and turnover hasn't been crazy. 

• Avoid riff raff areas where I wouldn't feel safe visiting

• Make sure unit mix of studios and/or 1s and 2s to keep a wider net for families and tenant types. 

• Make sure to a lot enough for each expense. Just b/c they list it on an OM or even in income or bank statements, doesn't mean you want to run the property with fly by night insurance or spit and bubblegum, or no marketing. Make sure the expenses are not just "what they paid" but also "what you will want & need to pay." 

• Rent in a market I'd like to visit, frequently if needed. Certain places are near friends/relatives and give me a double reason to visit, as opposed to having to fly to bumble-fack for no other reason than to deal with some nightmare. 

• Consider the population growth, employment growth, appreciation and crime statistics of the area. (This is the biggest crap shoot, feels very difficult to know for sure the way the wind is blowing in any given market, even if you live there.) Make sure there haven't been any major cuts at nearby plants. Make sure there's a Walmart nearby. 

• Look at market comps and cap rates and figure out if the property is priced competitively.  Make sure there's some way to position the property. Although, occupancy rates and rent roll is a good indicator, for stable cash flow props. Make sure the tenant base isn't going to become obsolete or can't afford raised rents, i.e. exclusively people on fixed income, veterans, etc. 

• Make sure you can set up a business that relies on algorithms for leasing, to minimize vacancy loss. Exploit ways to increase gross income, etc. 

Ok, so what am I missing? Question still stands about financing for first multifamily. 

Thanks guys, 

Jeb Riggin

sorry meant to say "buy" in a market I;d like to visit. You know, like a four hour drive from mom and dad, so I can sleep at their house a few times a year and relive my childhood without my wife/kids around. Pancakes in front of the TV, mmmm.

I personally like a lot of the mid century stuff that was built in the 50's and 60's.

I also feel that leases are a one-way street.  People can up and move on me if they want.  A lease will tie me into terms and leave me with less flexibility.  You will find that I have a lot of mo-mo tenants which I don't see as a drawback.

Games can be played with the income and expense reports.  I build my own models and use my own proforma.  You can pretty much bet that the one supplied by the agent will not be accurate.

All commercial I have dealt with has a 5-yr rate adjustment and right to call with a  20-yr max term.  They also require me to submit my personal financial statement and tax return every year for review.    Can't say I'm not a little nervous every 5 years, ya know?  There's always that chance the bank has decided to get out of that lending space.  

Originally posted by @Jeb Riggin :

What are some ways to get a fannie mae or conduit loan approved for a first time buyer of large multifamily (for a stable cash-flow buy and hold)? Regardless of ALL the property considerations (I know what they are), I've been told recently by a mortgage brokerage that I still need a guarantor who has direct & relevant experience / track record. If this is true, how does one make a foray into large multifamily (say 1.5-3.5m) without having to settle for a recourse bank loan? 

you pay for it

Originally posted by @Steve Vaughan :

All commercial I have dealt with has a 5-yr rate adjustment and right to call with a  20-yr max term.  They also require me to submit my personal financial statement and tax return every year for review.    Can't say I'm not a little nervous every 5 years, ya know?  There's always that chance the bank has decided to get out of that lending space.  

 I get nervous about every 5 seconds, so what you're describing would be a 10,000% improvement in quality of life.

I had a fannie mae lender tell me the other day that large multi family (like the 116 you mentioned Jerry) are right now going for silly prices. Multifamily is "hot" and newcomers are flooding the market looking to place $ in "stable" mf. The vets are waiting a few years now, for the newcomers to fail at making these deals work (because they'll pay too much up front for it to work), and then go in and buy up the properties at a discount. This might be total heresay but I get little stories from people like this all the time. Or you can look at news stories for trends. On the other hand, every deal is specific, and advise like this is general. It might be a good way to sum up what's happening on average, but it might in no way reflect the realities of any given deal. My personality is to want to know everything before I jump into something. But in this game, you just have to take one deal at a time and be conservative. Ignore the trends and the naysayers. Don't let the general infect the specific. 

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