10-Unit Apartment Investing

[Hai G.]

Hi BP, 

I'm currently looking at a 10-unit apartment building with value-add opportunity. I'm fairly familiar with the economics, purchase process, and requirements of SFH and smaller multifamily (less than 5 units), but not so for 5+ properties that are considered commercial. Many other resources I read focus on bigger complexes. What are some tips for getting started and things to look for in the entire process? Would be especially interested in learning about rough ballpark figures for terms of bank loans as well.

Thanks!

Hai

[Greg Dickerson]

@Hai G. Lenders will vary greatly. You need to shop several banks as well as commercial mortgage brokers as they will all offer different terms loan products.

[Bjorn Ahlblad]

@Hai G. I had a Silicon Valley windfall a few years ago so I can't help you with the loans process. As far as buying, focus on the similarities, the due diligence, inspection of financials, rent roll, leases, and premises. Be extra thorough as there are more things to look out for, and know your numbers. Make sure you have sufficient reserves, sometimes you get nasty surprises and money solves most problems most quickly.

Aside from the above, interview PM's diligently they can make you or break you. All the best!

[Hai G.]

Thanks so much for chiming in. @Bjorn Ahlblad

@Bjorn Ahlblad - An area I'm looking at is Seattle, if you have recommendations for good PM/commercial agent please let me know! Thanks again!

[Bjorn Ahlblad]

@Hai G.If you PM me I can recommend a good realtor for this area.

[Brian Hughes]

Sounds like we may be in a similar place.   I've recently sold a smaller (duplex) property and ultimately plan to reinvest those proceeds in a larger property - probably 6-8 unit scale with preferred location anywhere from south of seattle through tacoma.   I could theoretically go a bit bigger probably,  but I'm being conservative since I suspect we will get statewide rent control in WA similar to oregon's statue next year,  so I don't want to overleverage myself.

From the talking with a couple commercial lenders I gather the main differences from1-4 unit financing are:

1) variable APR, usually with a lifetime maximum cap.

2) 15 or 30 year amortization rate (or some other options) but with a balloon payment after a much shorter term, like 5 or 7 years, meaning you MUST refinance or payoff at that time. (and that also means if rates have gone up past the APR cap, you are forced into a more expensive loan)

3)  Somewhat higher rates vs.  consumer grade loans.

4)  Minimum down typically 25%,  but see notes on DSR - in high cost / low cap areas like seattle thats the limiting factor.

5)  Many lenders have minimum loan size requirements - often $500K to $1M but some go lower.

6) No prepayment / accelerated paydown allowed without a penalty fee.

7)  No Fanny/Freddie consumer protections.   Its all private.   So you need to have a good idea who you are borrowing from so you don't end up doing business with vinny and guido from 'da family' out of new jersey.

8)  Terms for qualification differ from consumer loans,  they look more at the income/debt (DSR, or debt service ratio) on the subject property than at your own income,  but that said you still have to have minimum net worth (equal to loan value for lenders I have talked to),  prove you have experience managing rental property,  etc.  Right now a common value for DSR in seattle area seems to be about 1.25,   meaning ACTUAL income at point of sale after all expenses needs to be 1.25x the principal+interest payment

I did actually qualify for a commercial loan several years back when I was looking at possibly buying a 5-plex,  but I ended up going with a different opportunity and bought a 4-plex.   However the qualification process really wasn't scary,  it was just somewhat different things they looked at.  In some ways, easier.

FWIW one option to look for which can get you into 5+ scale without commercial lending is to look for adjacent 2-3-4plex properties being sold as a group,  and get individual 1-4 unit scale loans on each.

Good luck.

[Tj Hines]

@Hai G., for 5 units I would seek out all community savings and loans banks. They may give you full recourse 60-80% LTV , 5-5.75%, 5yr loan term. Be careful taking on bridge loans products, if you don't have the experience. Those products can be risky in this market.

[Steve Vaughan]

Originally posted by @Hai G.:

Hi BP, 

Would be especially interested in learning about rough ballpark figures for terms of bank loans as well. 

Thanks!

I received a 25/5/20 @6.5% on my 10 unit mixed-use years ago.  25% down, 5 yr call and rate adjust, 20yr term. You also have to submit your tax returns and PFS to them annually.

Dont forget to factor in the appraisal cost.  Can be $3k-7k on these. These days probably paid POS before the appraisal is performed. Cheers!

[Jerry Padilla]

@Hai G.

@Shaun Weekes

Could give you some ballpark figures. He offers commercial financing.

[Nghi Le]

@Brian Hughes @Steve Vaughan

The commercial loans you mentioned seem pretty pricey. I'm closing a portfolio refinance next week with a rate under 4%, 5-yr loan with 25-yr amortization, and my appraisals/closing costs are covered up to $5k. Up to 80% LTV, but there is still the restriction of 1.25 DSCR, which you have to be careful because every commercial lender seems to calculate that differently (especially how they view expenses). No minimum loan amount, although I've been told that loans under $250k are tough to get both the low rate and the appraisal/closing credit. The loan also works for 1-4 unit residential properties, or a portfolio of them, in addition to multifamily/apartments, mobile home parks, strip malls, etc, as long as there is cashflow. Only available to WA residents, although can be used to buy properties in other states.

I've used the same loan in WA, IN, and the new loan I'm closing on next week will be for my PA properties, but my WA property is more like 60% LTV because our market just doesn't cashflow that well. I don't have to submit my tax returns and PFS annually either... just every time I apply for another loan.