Would a bank lend me money for a multi-family apartment building?

6 Replies

Hi all, I'm in the early stages of creating a REI investing plan, and to know whether a particular path forward is achievable I'd like to hear feedback whether this hypothetical scenario would get financing, either from a local/regional bank or commercial lender.

The Example Property

  • 45 unit apartment complex in western-PA
  • $2M purchase price
  • $500k down (25% LTV)
  • 45 units @ $44k/door
  • NOI $170k per year (1.8 DCR)
  • 30-year amortization @ 5% (just guessing. Not sure whether these terms are reasonable with the given 25% down)

The Buyer

  • $750k net worth
  • $100k/yr W-2 salary
  • $200k cash reserves after downpayment
  • No debt
  • No real estate experience

The plan would be for the first 6-mo to 1-yr to hold down the W-2 job and use property management until things have stabilized and I'm comfortable with returns. Then quit the W-2 job and become a full-time property manager. So the question is... can I expect to finance something like this? The above scenario is based on this property, with the numbers rounded for simplicity.

If the apartment is performing, yeah, I would think you could get a local bank to finance that. It will probably be a 25 year amortization though. 

Experience may be an issue.  Hiring an experienced property manager might help.

You won't get a 30 year fixed rate loan.  15, maybe 20 year fixed rate might be possible.  ARMs or balloons are possible loan terms, too.

Most lenders won't do this deal.  You will need to do some digging to find a lender.  They are out there.

These numbers from the listing are highly suspect:

Effective Gross Income $292,657
Operating Expenses $121,058
Net Operating Income $171,599

Operating expenses are likely higher than this and NOI is likely lower. If these reflect actuals for the last few years then there may be significant deferred maintenance.

Hi @Jon Holdman , thanks for the quick analysis. If you would be willing to explain, what rules/metrics did you use to be able to scrub those numbers? If I had a guess, you used the 50% rule to see that operating expenses are too low (50% of 292k should be $146k). But I'm not sure why you would expect NOI to be lower than stated. Unless maybe you're making a point about sellers generally upselling income and downselling expenses?

@Andrew Berg , @Jon Holdman does know his stuff but I don't necessarily agree with him.  Operating expenses could be high, but that doesn't mean those numbers you've been given aren't real. Based on your response, sellers do generally upsell income and downsell their expenses, but if those are based on actuals, then so be it.  With that said, most lenders will look at what the market commands and base #'s off of that, so let's say that market expenses for the property type, condition, etc. are 50%, then usually the numbers will be ran as that, not necessarily the actual although it will likely be taken into account.  

As far as financing, you'd need to find a lender who is comfortable with your experience; I think strong management in place would be able to compensate for that, and you're not weak as far reserves are concerned, even if you had to come in with 30% instead of 25.  You being an absentee borrower also is likely a concern, but it could be overlooked.  Depending on program and type of financing, you also might be able to get higher leverage, if that's something wanted.

Being in commercial real estate financing, a 30 Year amortization should be possible on something like this, it just might not be with your local/regional bank.  Just my .02.  

Reach out if you like.



Apartment complexes usually come with higher expenses. One of the guests on the podcast suggested using 60% for expenses. This may be even higher if the landlord pays for expenses. The justification is that the apartment building tenants are taking less care than the SFR and smaller multi-family.

On the other hand I did try getting financing for an appartment slightly smaller than yours and several local banks were OK providing financing for it but after they checked the property they backed out. It was one of those deal that normally is called "don't wanna" property. The owner have pretty much destroyed it through bad management and deferred maintenance. Due to poor conditions, it was only 50% occupied. A deal with a lot of upside potential but the banks could not see it that way. They promised to finance me when I stabilize the property. Even 50% down was not enough to entice them.

The claimed expenses are 41% of gross rents.  Those could be true.  But they are nevertheless optimistic.  Especially in a cold climate.  Expenses can pretty easily be controlled for a few years by simply shorting the maintenance or deferring capital items.  Don't assume this 41% rate will be what you will experience over the long term.  Its unlikely.

This seems like an OK deal, even assuming the expenses are understated.  With more realistic assumptions about expenses/capital/vacancy, and a 30 year, 6% 75% loan (based on 1.75 million purchase price) I get a 11.9% cash on cash return.  Shorter amortization hurts that, though.

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