Gordonsville, VA · Member since 2016 · 4 posts · 0 votes
I'm a true newbie and just had my first offer accepted on a 16 unit apartment complex. It was listed for $723K and offer was accepted for $675K. So... how does the financing work? Is it based on projected income of property? I'm looking to let the property pay for itself and want to use a minimum down payment. All the units are full and it has a property manager with a waiting list for more wanting to rent. Property is located in Waynesboro, VA.
Based on your questions, it sounds like you need to do some quick analysis ASAP so that you can have an intelligent conversation with the bank.
Most banks will be looking at the net income of the property and the debt service coverage ratio (DSCR). This is how many times the net income of the property will cover the loan payments. Many banks are going to want a minimum of 1.25, meaning the annual net income divided by the annual mortgage payment should be 1.25 or more. I would estimate the mortgage payment by running scenarios of how much the payments would be at 20 or 30% down (typical required deposits) and using whatever the interest rates are for those types of properties in your area (ask a mortgage broker).
Make sure when you calculate the net income, you account for some vacancy (the property manager should know what the rate is for your area) despite the fact that the property is currently at full occupancy. Also account for normal operating expenses, estimated property taxes (as these will probably be higher than what the previous owner was paying, due to the sale) and reserves for ongoing repairs as the bank will be considering these factors also.
Go to the bank and tell them whats up. I bought a very similar deal last year without much experience. I needed 30% down. I got a small bank to take a chance on me the big banks wanted nothing to do with me. Good luck I would get your prospectives and all of that together, along with credit reports, tax returns, pay stubs, retirement account balances all that. Make sure you can tell then about market rents your plans for reserves all that good stuff.
Maybe its not such a good deal after all, depending on my down payment.
Yep, the DSCR is tricky. I just ran into that myself:). Also, do those expenses include Insurance and property tax based on your new purchase price? You should really take a really hard look at that and get some actual numbers. I find it hard to believe that your expenses would really be less than 25% of rent, I would expect them to be over 40%. A property that is being sold for a price that is anywhere near reasonable is usually not managed extremely tight...
One more thing: what interest percentage are you using? For a small (under 1M loan) deal like this I am being quoted rates of around 5% for a 25 year amortization (not 30!!) and a rate adjustment after 5 years... This is what killed my DSCR on the last deal I looked at. Like your numbers show you'll have to put a very high percentage down to make that work, and even though you might or might not have that money laying around, you still incur opportunity cost on it; no such thing as free money.:(
I'd advice against going with a 30 year amortization. Very few banks offer them and this is without a doubt a bank loan. Most banks offer 25 year amortizations with a 5 or 7 year term. Occasionally, you can get a 10 year term, but not likely.
The best I've seen, EVER, (and that's now) for commercial money is 20-25yr am at 3.85% with 20% down. Someone made an offer for 2 of my bldgs and was quoted that from a national lender recently.
To offer on a property like this without a way to come up with at least 20% down is just irresponsible. It doesn't all have to be your own $, but need to have a plan. Typically the DP req's are closer to 30% on these smaller commercial deals.
Any EMD at stake here @Jim Wilder? Education comes in many forms....