How do I get a loan for a (mostly) vacant apartment building?
I have a 12 unit apartment building under contract in Cleveland, OH. The building is vacant because the it has been neglected over the years. This presents a great opportunity for us to buy at a discount, rehab, and rent out at much higher rents. However, because 11 of the units are vacant, most banks are afraid to lend money for the project.
The purchase price is 170k and we estimate it needs 100k in rehab. My partner and I have great credit, income, and liquidity. The best option we've found at this point is hard money for 11 months (70% LTV, 2-3 points origination, and 10% interest) then refinance once the building is stabilized. We'd prefer to get into a loan with better terms. Anyone have any ideas?
Thank you!
@Kyle Lewis - Does the $170k accurately reflect the Cap rate of the current NOI with all the vacant units? If your numbers make sense then you should be able to find a commercial lender that will lend on the buildings current merits (at least I assume this much having never purchased an apartment building before). If you are paying at a much lower Cap rate due to the potential the property has, than the only way I can think of is a larger down payment so that the loan hits the right cap rate, purchase it with a private mortgage, bring on additional equity partners so that you can buy cash, or you could shop around and see if someone will give you a construction loan. The local back near me will do construction loans at 70% acquisition, 1 point origination, 5% interest only payments for 6 months with an option to extend to 12 for another 1 point. So given the heavy amount of work it needs this later option may be your best choice?
You could try Hard Money lenders.
@James Masotti thanks for the suggestions! The $170k does not reflect current NOI and realistic cap rate. The price is based on what the NOI should be, which I understand is very risky, but this is a situation where the current landlord purchased the property without ever seeing it, isn't willing to put any money into the property to update or fix things, and wants out. So the 170k is based on NOI if occupancy were at 80% with below market rents of $400/unit and a cap rate of 11%. Based on rental comps on that street and how poor of condition the units are currently in, we feel confident we could get $600/unit and about 10% vacancy. For the 11 and 12 month loans, what does the borrower do after the 11/12 months? I'd assume refinance, but don't banks want to see more historical performance than just a couple months of rental income?
@Nicholas Novak thanks Nicholas! That's the best option we've found, but what happens at the end of the hard money loan? I'd assume refinance, but don't banks want to see more historical performance than just a couple months of rental income? Is there ever an option to extend the hard money to get more time?
You can do long term hard money financing, lots of lenders will do a purchase/rehab loan that will convert to a permanent loan at 6-8%.
As far as if you need more time on hard money most lenders will charge another round of points if you go over the 6 months on a non permanent loan
Hi Kyle,
There are lenders out there that have bridge-to permanent financing programs. The terms for the bridge loan will be similar to what you mentioned in your initial post, but having both the bridge & long term products with one lender allows for an easy transition once the property is stabilized.
Feel free to PM me and I can give some info on a lender I work with
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Lender
- CV3 Financial Services
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You will need to get some type of non traditional funding. Friends, Family, Fellow investors etc...Commercial lenders will want to see income on something like this.
@Kyle Lewis your best bet is to go with a bridge loan for acquisition and rehab. They will run on a 1 to 3 yr term interest only normally. This will allow you to rehab the property and then fill the vacancies. You'll need to get it 85%-90% filled before refinancing into a long-term financing. You can do an 80%LTV on the acquisition and 80% on the rehab funds. Let me know if you have any specific questions!
@Kyle Lewis the bridge financing is a good bet. I would look at doing a construction loan and you have to find a bank that is willing to be creative with you. Most people look at construction loans as being from the ground up. However, you can get a construction loan on an existing building as well.
This is set up as a draw line of credit with the first draw being used for the purchase. You can then draw additional funds as you work on the project. This has the benefit of you only paying interest (and it is set up as an interest only note) on the amount borrowed. A lender will require good construction/rehab estimates prior to funding the deal though.
Also consider your time frame and work with your lender. A single family home construction loan is typically for a year. Get a lender that will match your timeline with the length of the loan. On the back end sometimes you can get them to automatically roll into a permanent financing but more than likely you will have to refinance out of it.
@Kyle Lewis explore a construction loan financing. They will have interest reserves so you can fix the place up while not having any rental income.
DO you own a small business and can get a small business line of credit from a bank?
@Devon Garbus, have you (or any of your clients) ever used a small business line of credit tied to a separate business to put toward a property? If so, I'd love to hear more.