How to Finance a Small Apartment Building

Question

I know FHA offers apartment loans at 87% LTV.  That's great, but what if the apartment building I want is still slightly out of reach?  Is there anything else I can add to the stack other than friends and family's money?  Will a bank add a second mortgage?  (Or does FHA even allow a second mortgage?)

Alex Bekeza · Answer

@Mark Creason He's talking about FHA 223(f).  They do 87% LTV.  @Jim Macedon They allow up to 7.5% in Subordinate Debt on a case by case basis.

Couple of key points on this product:

Minimum Loan Size is $1 million

Experience is required so @David Acosta 's point of partnering is typically the best idea

Property must debt cover over 1.17.  With such a high LTV loan which requires mortgage insurance you may have a tough time finding a deal that would cash flow.

Oh wait here's the best part of this program.....

Average processing time is 6-9 months!  lol anyone else still interested?

In my opinion..... you're 100 x better off finding a principal partner and coming into a 5+ unit investment with at least 20% down.

Theo Hicks · Answer

FHA apartment loans are through HUD. But they aren't the same as the 3.5% FHA loans on residential properties. For apartments, unless you do creative financing like a master lease, you are going to need to bring around 25% of the project costs to the table.

Chase Louderback · Answer

@Joe Bourguignon yes, it will be recourse debt and you will have to find a smaller bank/credit union that will be more aggressive on their lending.  I believe @Gino Barbaro said in one of his podcasts that they have gotten terms at around 15% LTC (with construction repairs wrapped in).  Hopefully Gino will correct me if I'm wrong!

Those same banks will generally entertain the seller holding the note for the downpayment of the loan since it is still recourse.  This all depends on your relationship with the lender and your personal track record.

Tom S. · Answer

@Jim Macedon  Hi Jim - how did this deal work out?  Were you able to find financing?

Samuel James · Answer

Try all the creative financing options first. Master lease first is the best option. Two agreement for deed.  If you can get the property with owner finance and have that 2 year seasoning you will have no problem doing a refi.

Leonard Destine · Answer

@ Theo Hicks.

How does master lease works?

Allyssa McCleery · Answer

@Alex Bekeza Based on what you're saying it sounds like this will only work if a seller is super motivated to sell to you (family member, etc). It seems like this would be the least competitive way to acquire a property.

David Acosta · Answer

Hey @Jim Macedon - you may want to consider partnering, and bringing a key principal on board to act as your loan guarantor for this transaction.  Ideally, their balance sheet will strengthen your position and increase your loan proceeds.  As others mentioned, a smaller local bank may be open to a seller financing option. All the best moving this forward!

Allyssa McCleery · Answer

I had no idea there are FHA loans for apartment buildings. Does anyone have recommendations of where to find this type of lender? I didn't know you could get a commercial loan for less than 20% down!

@Joe Bourguignon You can seller finance the rest if they are willing to do that. I know with some bankers they do not want to see your down payment coming from an additional loan but seller financing may be a different situation. The seller would need to be in second position so you should figure out what will make this offer attractive to them and you will probably need (depending on the seller) to have your own (or partners') equity in the property so that if you foreclose the bank and the seller are not at a loss.

Joe Bourguignon · Answer

Is it possible to get a bank loan to 80% LTV and seller financing for the rest? I'm assuming that in that scenario, the seller would be in 2nd lien position, and I'm not sure how you re-assure them about that...?

How to Finance a Small Apartment Building

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