Would I have any chance of getting a commercial loan

Question

I want to build a 12 unit apartment building.  I have $120k saved up.   I would be willing to use all of that as a down payment.  I'm 27 years old and my only credit is from paying credit cards and my student loans(both paid off).  Also I would be quitting my job when the construction starts.  Is there any chance I could get a loan for the remaining costs?  I would need to borrow an additional $200-300k

Ethan Vegas · Answer

First of all, yes, I agree that $120k is a commendable amount to have saved, especially for a 27 year old. This is the exact reason I advise caution in beginning a construction project as a first time investment. Being a significant sum, I would guess a high likelyhood of success is a must.

Kal M., this is a mighty fine saying....it's got the moon and stars in it and everything! It may hold true for other areas of life, and maybe even other areas of investing, but I don't see any application to ground up construction. When you shoot for the completed project (on time and on budget) "moon", but fail to complete and find yourself amoung the partially constructed "stars" you usually find yourself crashing back to earth with less than your original $120k. In my experience, partially constructed projects are worth little more (if anything) than the land they're built on. If money runs out (but when does that ever happen), you're left with quickly partnering with/selling to another developer, or letting the lender take it back (in which case Chris has bought himself a $120k education he won't likely forget). Again, just my opinion based on my experience, but I'd love to learn from you, Kal, if you've experienced something different.

Please do talk to your local bank Chris; you should have a relationship with them anyway. Having worked in commercial bank finance for 10 years, there would be some serious challenges in getting this done conventionally if it came across my desk, with or without the 30% down.

I encourage caution, and probably an intermediate step....maybe partner up with someone locally?

Good luck Chris!

Karen Margrave · Answer

Chris O'Brien Welcome to BP! You've come to the right place to get educated on every aspect of real estate investing. You have already been given some great advice.

I agree that your work schedule and travel make it very difficult for you to do that; and run a construction job. Though a 12 unit apartment complex is not huge, it is a sizable project for someone with no experience. Honestly, for your first project you might be better off scaling down to a house, learn the entire process and then see if you want to do it again. Though construction seems like a simple process, and in some cases it can be, it also can be very challenging and costly if you don't know what you're doing.

You might also want to look at participating in some other area of real estate investing that doesn't require as much attention, while allowing you to continue with your job.

Best of luck.

Joel Owens · Answer

Ambition is great but sometimes people have to know what they are taking on is too large for their experience level and risk exposure to the cash reserves.

Sometimes you just do not know what you do not know. At the very least if this is pursued you should bring in a local investor partner that has experience in ground up development to give yourself a fighting chance.

There are calculated risks and then insane risks.

Let's keep the content and discussion respectful on here without throwing labels around. Nothing good comes of that and takes away from the valued discussion of the topic.

Kal M · Answer

Hey Chris, no your not aiming a little too high, there is a saying that says its better to aim to high because most people fail because they aim too low . Aim for the moon and if you miss at least will be among the stars. dont listen to any haters in here, do your own research by going into a bank and ask them your self, it seems to me $120,000 saved is a lot of money and the bank will trust you in your business plan since your willing to invest $120,000 into the business thats a third of what your asking the loan for which i think you have a very good chance of getting the loan.  Congrats, not alot of 27 year old have $120,000 saved up.

Ethan Vegas · Answer

Chris, the basics of any loan (and the attractiveness to the lender) come down to two main factors....cash flow (aka net profit, income, debt service) and asset coverage (aka net worth, ARV, secondary support, LTV). In this case, it sounds like your wife's continued income (which may or may not be adequate for payments), and the value between your After Repair Value and construction costs are the main factors the lender will need to get comfortable with. As this is your first project, and your household income will significantly decrease once construction starts, my guess is you'd be looking at a lender that somehow is interested in the proposed project, would be willing to finish it if you can't (you've spent your reserves), and will be deinitely lending at a high cost. My main point is to advise caution as ground up construction is a serious step, and is rarely the first right step. I'm in LA, and I understand high costs to buy an existing building, but deals still exist out here (I'm sure they do in your market as well) if you are patient an committed in the search.

Chris O'brien · Answer

Thank you for the replies.  I'm probably aiming a little too high but this is just a preliminary discussion.  Maybe a 4-6 unit building would be more realistic.

Joel Owens I would have to quit my job.  My job requires me to live away from home for the majority of the year, I live different countries for months at a time.  So when the construction starts I won't be able to do both.  I would be working on the apartment building along with the contractors.  My wife will still be working and we bought our house cash so that is how I will survive.

Ethan Vegas What exactly would help make this deal work for the lender?

Tom S.  It seems that multifamily buildings are very overpriced in my area so that's why I'm looking to build.  Forgive my ignorance but why do lenders view new apartment buildings to be so much more risky?  I would imagine that rehab project would have a lot of risk as far as unexpected costs and vacancy rates.

Tom S. · Answer

Chris O'brien - as an investor working with commerical lenders, I've been told the lenders view new apartment building as very risky, especially if you don't have a track record.  They are much more comfortable having the investor buying and rehabbing existing buildings.  That's my personal experiecne, and I'm just to the north of you up in Vermont (been through Adams, MA a number of times).

- Tom

Ethan Vegas · Answer

I agree with Joel, the question that needs to be asked before "does this deal work for the lender" is "does this deal work for you". Believe it or not, you may be able to get a loan on this from someone, but the terms they would require would likely add more risk to you, especially with little to no reserves.  I'm sure there may be more going on behind the scenes, but a ground up construction is a big undertaking with many moving parts....a more manageable project may be a better idea for now.

Joel Owens · Answer

Doesn't sound like it to me. You are going to liquidate all your available cash and then immediately (according to you) quit your job.

What will you survive on and what reserves will you have when the project hits snags??

A 12 unit you are looking at a 6 to 12 month project at least.

Would I have any chance of getting a commercial loan

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