Good Morning, Folks -
Looking to see if anyone's willing to talk about how they got their foot in the door financing their first apartment building. I am a new investor (bought my first SFR in July) and am starting to realize my business goals are more cash-flow focused, instead of appreciation based. I have a background managing large properties (200 tenants+) and would love to own something of that stature someday.
Issue is, many nice places I'm looking at in my markets of choice (Dallas, Raleigh, and Rochester) are well over $1.5M. Coming from a guy who is working the BRRRR cycle on small SFRs to the tune of refi'ing and cashing out $25K-$30K at a time, I can't imagine how long it'll take to build up the equity for a down payment on $1.5-$2M. Well, I can imagine... because I can do math... but man that's a long ways away!
Anyone out there have any creative methods they used in their quest to buy that first mid-large sized apartment building? Would love to learn more!
@Pete Fiannaca , not only will you need the cash for the down payment, you will also need a net worth typically equal or greater than the loan amount as well as liquidity post closing that covers 9-12 months of principal and interest. A lot of investors we work with on the financing side would not have sufficient liquidity nor net worth and therefore partner up with other investors to syndicate a deal - depending on your expertise, you may want to invest passively with others first (to gain expertise) or jump right in and act as a sponsor or co-sponsor of a deal. There are a number of very active syndication groups based in Dallas but they also invest outside of Texas - PM me and I am happy to discuss the pros and cons of each offline.
Are these class A property in A neighborhoods? Or B property in B neighborhood? Are there any lower price point property that are value adds in a good neighborhood?
The good news is there are some programs where you don't need a net worth equal to the loan amount. Freddie's SBL program is a good example, BUT that's not to say you can be weak financially.
You can syndicate funds to raise the down payment, and I've gotten around weak sponsor financials before by raising additional funds that are held be the lender as reserves. Then, you need to ensure you have someone on the guarantor side with experience owning similar sized assets. Freddie can overlook this somewhat if you use professional management, but if you're working with banks you're fighting not only the experience component, but the net worth requirement, AND being an out of state investor.
Point being, it's important to know now only what you can buy, but who you're going to use for financing as you need to consider what financing hurdles you'll encounter. If your likely price point is less than 1MM than banks are going to be the best players, but they can also have high barriers to entry with regards to liquidity/net worth and who they'll lend to.
@Darryl Dahlen , Not trying to start an argument here but Freddie's SBL program requires a net worth equal to the loan amount:
The program can be flexible. I've closed a loan under that program where the borrower had what I'd call weak net worth, but Freddie liked the property, management company, and the borrower had the decent post-closing liquidity.
Like a lot of loan programs/lenders, it's not an "all or nothing" process, but it takes experience to know the lay of the land and ensure that you're putting square pegs in square holes.
Since Freddie SBL lenders do not have underwriting authority, you take a significant risk going down that road with a net worth that requires an exception. Also, while you may want to take the risk for a refinancing, in today's sellers market for multifamily properties, any decent investment sales broker will not recommend a seller to pick the offer of a buyer with less than adequate net worth.
Are you looking for votes or simply to try and show your financial prowess here? Freddie blesses the loan before the borrower officially engages the lender so I don't know what you mean by "significant risk going down that road". The agency lenders, or at least the ones I use, present the loan request o the local Freddie field office to get their input so that all the cards are on the table, including anything that may not meet Freddie's guidelines before they issue a term sheet.
I have had an exception, or two, on every Freddie loan I've done, but again, those were granted before the term sheet was issued except in one case where there was some deferred maintenance issues that were present in the property condition report, but Freddie granted an exception as the work could be completed inside of 90 days.
Your comment about the sales broker is a separate issue.
I would suggest you talk with commercial mortgage broker.
They can tell you what will be the best option for you ..
Typically for the first time buyer small local bank would be the best option, and you may get up to 75% leverage ,depends on the deal, but talk to the professionals :)
It will cost you a little bit more but from my experience good mortgage broker worth every penny especially if the deal go south.
You can check OldCapital - http://www.oldcapitallending.com/ - they helped me with 3 transactions (~198 units total) in the last few years ..
I'm with Old Capital. There aren't many down payment options in the traditional sense - your money, partner money or syndicate (more partners).
I uploaded a teaser version of How Apartments Get Financed on BP's FilePlace. Take a look, then give me a shout if you'd like. Contact info is in my signature, BP profile, as well as the doc.
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