Purchase an Apartment Building... how? what do I need?

14 Replies

HI BP!

I'm looking to purchase my first commercial apartment building.  I know financing is different from standard residential units however I'm not sure exactly what I should prepare for. 

My questions:

How does financing typically work?

What are lenders looking for?

Anyone care to share their experiences?  

Thank you in advance!

@Addam Driver Hi Addam. Just curious as to why you want to start out with a larger building. Have you thought of starting off with a fourplex so that you can get a residential loan? I have the same dreams as you, but I started with single family homes, next we are going to do a fourplex and after that see how to get into an apartment building.

Hi @Elenis C. !

I have 6 units (3 duplexes) now. I'm looking to go after big game. Two were purchased around the same time and using the BRRRR strategy, my refinance numbers are pretty good. So instead of buying more of those, I am considering an apartment building. It's unfamiliar territory to me. That's why I was asking.

Hope this helps!

@Addam Driver for that size building without previous investing experience, you'll probably make a 20 - 25% down payment and need some cash reserves. Also if the building needs repair or is already rented will factor into the loan amount, terms and interest rate. What are the specifics of the buildings you're looking at? 

Updated over 2 years ago

Ok I see this isn't your first deal, so your current property value and income can be factored in as well.

Originally posted by @Addam Driver :

HI BP!

I'm looking to purchase my first commercial apartment building.  I know financing is different from standard residential units however I'm not sure exactly what I should prepare for. 

My questions:

How does financing typically work?

What are lenders looking for?

Anyone care to share their experiences?  

Thank you in advance!

 If you have no experience with properties this size, stick close to home.  Lenders will have a hard time lending you money if you're not close.  Many lenders have a 150 mile rule.

Different lenders have different rules and where they sell the loans determine the level of scrutiny each lender has.  Some don't care about the borrower's income, but put a lot of emphasis on their credit and experience.  Others want to see the property's income numbers for valuation and then borrower's financials.  

The short answer is the financing depends on many factors; income/assets and credit of all partners or parties to the transaction on the buyer's side, operating income statement for the building, deferred maintenance, occupancy all come into play.

Stephanie

@Addam Driver Securing Multi Family investments typically requires heavier underwriting on the property side.  When dealing with a seller you will need to obtain:

-Current Rent Roll

-2-3 years of Profit and Loss Statements

These are the two most basic elements in beginning to "pre underwrite" a loan for multifamily. In 9/10 cases the lender will require a certain DSCR or "Debt Service Coverage Ratio" to be met.

If you cannot obtain these from the seller, then you will either need to construct them yourself from piecing together bank statements and receipts (sounds fun right?) or move on.  The lender will need to ensure your net operating expenses can cover the debt and they can't establish that without solid financials.  

Lenders also have a lot of other things they'll consider like:

-Property Location 

-Local Economy/Population Trends (Figure you want at least 25k people or be nearby a city of over 100k)

-Zoning - Building must be properly zoned for the amount of units it has

-Experience (you have enough experience to qualify for a multifamily investment)

The truth is there is no one size fits all answer because every lender has their own guidelines which is where a broker comes in handy. 

Feel free to reach out anytime.  

Hi Addam,

To qualify for commercial financing, a lender is typically going to want to see a net worth equal to the loan amount and liquidity equal to approximately 10% of the loan amount. Also, depending on the size of the deal, they will want someone with experience as well. 

To determine how much they are willing to lend, the will need historical financials and a current rent roll of the property in order to determine the NOI.

In regard to down payments, expect to pay a minimum of 25%.

Commercial loan lengths are shorter than residential loans. 5 years is standard, at which point you will need to refinance or sell.

Hello Addam! One of the most is your education and being able to read and understand financial statements.  The deal has to make sense to you.  What might need to learn how to raise money and form Partnerships where you stay in control.  I would start the refinancing a year before the current note  expires. The lender, depending who they are, want the property's value versus what you owe.  That might want to see that you know what you are talking about.  The more you know about what you're doing, the better.  Know how to read and understand financial statements and know the difference between assets and liabilities. The simpler, the better.

Good luck to you!