Is this too small for agency debt?

Question

Hey BP,

I'm an investor here in Bryan / College Station, TX. This metro is a great market and I love my portfolio of 4-plexes but I'm looking to take down an apartment complex. As I expand my search throughout central Texas I'm finding deals in smaller towns (population 2k-8k). When it comes time to fund these deals with agency debt, am I going to get push back because of the population?

If you were going to get funding in these size towns, purchasing $1-2 million apartment complexes, how would you go about it?

Conor Freeman · Answer

@Gregory Schwartz Fannie Small Balance isn't as competitive as Freddie SBL at the moment. They're pretty much leaving that part of the business to Freddie and focusing on larger stuff. Fannie will still do small deals but there is a large increase in spread for deals under $6mm and it pushes rates well into the 4%'s. Freddie SBL has an excel list of every county in the country and whether they consider it very small, small, standard, or top. I can send it to you if you would like. The sizing for the market tiers with Freddie is:

Top: - 80% LTV Acquisition, 80% LTV refinance, 1.20x DSCR

Standard: - 80% LTV Acquisition, 80% LTV refinance, 1.25x DSCR

Small: - 75% LTV Acquisition, 70% LTV refinance, 1.30x DSCR

Very Small: - 75% LTV Acquisition, 70% LTV refinance, 1.40x DSCR

Like others have said, 5 units and up and small towns are okay if the deal makes sense. Freddie SBL is currently pricing in the 3.5% - 4.0% range. Hope this helps!

Conor Freeman · Answer

@Arn Cenedella Yep you nailed it. The LTV's above are maximums and DSCR's are minimums. More often than not we're constrained by debt service. In higher cap rate markets we're able to get full leverage (>5.5%-6.0% cap rate) but your NOI and Freddie's NOI will be different and max leverage is tough to achieve in smaller markets with a higher DSCR minimum.

For underwriting purposes, take the in-place rents, minus the greater of actual vacancy, economic vacancy, or market vacancy with a 5% minimum. Plug in a market management fee that is similar to in-place (3%-5%) and add $250-$300/unit/year in reserves. That will get you close to Fannie/Freddie's NOI.

Gregory Schwartz · Answer

I found some good information on this website. It seems accurate...

https://www.commercialloandirect.com/fannie-mae-multifamily-mortgages.php

Looks like the MSA population has to be around 200k+

Arn Cenedella · Answer

@Conor Freeman @Gregory Schwartz

Just to confirm what @Conor Freeman wrote:

I got 70% LTV 3.88% 7 year term with 1 year of interest only from Freddie in Greenville SC on a $2M loan.

One additional note, LTVs shown by Conor are maximum LTVs.

Freddie still underwrites the deal themselves, they calculate their own NOI and base their loan amount on that. So you might not be able to get the full “stated” LTV.

Freddie has gotten tougher on their underwriting since Covid.

Arn Cenedella · Answer

@Gregory Romano

You are exactly correct. I wanted to start with the basics but you are beyond that!

Generally agency debts starts at $1M so you probably need a $1.4M purchase price.

Agency rules change based on size of market so check that too.

I just got a $1.961M Freddie SBL on a $2.795M purchase in Greenville SC.

Greenville County is 450,000 population but still considered a smaller market by Freddie.

Jared Rine · Answer

@Gregory Schwartz..seems like you've gotten solid responses from parties who know what they're talking about.  Usually for funding these types of deals, local and small community banks/CU's are the best way to go.  I would say bang the phones, see what a depository relationship might do.  If there are any bigger banks that have branches in the area, you also might want to contact them.  That's usually where I start with my clients if my go-to's don't want to do the deal and/or I don't have a relationship in that location.  Agency will still be tough in very small markets, but do-able.

Arn Cenedella · Answer

@Conor Freeman

On my latest acquisition, Freddie added in a $15,000 a year payroll expense on a 43 unit deal where there was no payroll. We worked around it. But be prepared to “fight” for every dollar of loan amount. 😀

Gregory Schwartz · Answer

@Arn Cenedella Ok that good to know. Greenville, SC is definitely a larger market compare to where I'm shopping. We learned the "max LTV" the hard way, thought we were getting a 75% LTV until the DSCR didn't hit the local banks minimum.

Pete Harper · Answer

@Conor Freeman

This makes a lot of sense. Last March I was having trouble finding lenders for a cash out refinance on a 4-plex in BCS. I ended up with a small regional bank willing to make a portfolio loan. Terms were 80%, 4.25%, 15yr.

Within the next year I plan to cash out refinance a 12 unit in a super small market. <17k people in the entire county. I put out feelers with the same small regional bank and they sounded interested. I’d like to find 30yr but if what you say is true it may be tough.

Gregory Schwartz · Answer

@Conor Freeman this is super helpful. I’ll DM to get that excel list from you

Is this too small for agency debt?

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