Getting an Apartment loan
Right when you have a purchase and sale agreement signed, you will want to begin securing financing on your new building. Even before that you should have talked with lenders about what you are doing, given them your financials and prepped them about the property type you would be purchasing so that you understand the type of financing that will be possible and if it will be possible. Don’t just talk with one lender. Depending on the type of property you are buying, you should be talking with local banks, regional banks, bridge lenders, mortgage brokers and potential life insurance companies.
The type of financing will depend on the type of deal, which we will briefly cover. If you are buying a stable building with 90%+ economic occupancy (paying tenants) and the amount you will finance is $1,000,000 or more, then the property may qualify for non-recourse agency debt (fannie mae or Freddie mac). If your building is in need of repair and has high vacancy, then you may need to go the local bank route or a with a bridge lender.
There are 3 basic types of lenders: Local, national and conduit lenders
Local lenders are your savings and loan institutions and your local/regional banks. These lenders are great because they can be very flexible and easy to work with. They also know the market and can get things done quickly and save you a lot of money on fees. If you’re investing in your own backyard, this lender is a great option. If you are investing out of state, then you will find these lenders to be challenging. A few downfalls with local lenders is that their rates are often a little higher and their amortization is usually 20-25 years with a 5 year arm. They also usually will require recourse, meaning if you fail on the debt, they can go after you personally. One of the biggest benefits to using a local lender is that they will give you the best construction loan or bridge loan possible.
National lenders will lend on properties all over the country. These lenders will sell the loans to the secondary market, so they will provide financing based on Fannie Mae or Freddie Mac standards. The standards for these loans will vary depending on the market and property, but you can expect the following:
70-80% Loan to value
Loan must be over $1,000,000
Occupancy needs to be at 90% or better for the past 3 months
Debt service coverage ratio of 1.25 (meaning you need to be making $1.25 for every $1 of debt payment)
Low amount of repairs needed and they typically won’t lend on repairs, especially in secondary markets
They prefer pitched roofs
Primary or Secondary markets. Often you will have a much harder time getting financing on in small markets, especially under 100,000 people.
These types of loans can often be fixed for 30 years at low interest rates and locked in for 7-10 year+ terms. There is also usually a pre-payment penalty if you sell in the first 3-5 years and sometimes longer.
Conduit lenders will also lend nationwide, but often get their money from Wall Street. Conduit lenders are usually more flexible that Fannie/Freddie, so they are more likely to fund a deal with some imperfections and also provide non-recourse. These loans usually are a little bit higher in interest rate, but often 30 year amortization. You will also often see pre-payment penalties on these loans and they want to see the loan balance over $1,000,000.
Beyond the type of loans that you can get, you should be sure that you are talking with the right people to provide you with a solid loan for the type of purchase you will be making. Talk with the local banks, large national banks and commercial mortgage brokers. Commercial mortgage brokers will charge you 1% to get the loan done, but they can be the difference from getting financing or losing a deal. On my most recent transaction it would not have happened if I did not contact a mortgage broker.
How do I qualify for a large loan?
I hear it said by guru’s, authors and other “experts” that the lender will look at the deal and not you. Well, I am here to tell you that is not true. All types of lenders will look closely at the deal and will give you a loan much quicker and easier if the deal is in a great area, with great cash flow at a great price, but they will not lend on your deal if they don’t like you. With every lender you can expect that they will look at your tax returns, your personal financial statement, which will show your net worth), your bank statements and dive deep in to your experience and your teams experience. The lender wants to be sure that you know how to operate the property and that you are worth something in case you default. A few things you will need:
Net worth at or near the loan amount
Liquid capital to purchase the property with reserves
Reserve fund of 6-9 months of the monthly debt payment
Experience close to the size of the transaction
If you have purchase some single families and duplexes and go out to purchase a $5,000,000 building, expect to have a difficult time, unless you are able to bring in someone that will co-sign with you. This person is also known as a Key Principal(KP) or loan sponsor. They will come into the deal with a high net worth, experience, cash or all 3. Likely you will need to pay them for doing their part.
Putting together a package
Once you put a property under contract, you will want to begin putting together a loan package for your lender/broker. Some of the major items that you will want included:
Business plan for the property with pictures. I usually do a full out business plan that is 8-10 pages.
o Bio of you
o Key highlights of the deal
o Details of the property, tenants, occupancy, etc
o What you will do with the property
o What makes that market good
o Comparable sales and rents
o Property manager and other key team members
Purchase and Sale Agreement (PSA)
o Highlight key dates
The Listing Brokers Offering memorandum
Current rent roll
Trailing 12 month Profit and loss
The last 2 year of financials on the property
Your pro-forma (I like to go out 5 years with this)
The last part of financing is getting the equity capital. If you don’t have all the money needed to close, then how do you get that money? Stay tuned for next weeks blog.
To your success!