Financing the purchase of an apartment building can seem like an overwhelming task for the first time investor. Generally, I have seen that both novice and even experienced commercial real estate investors underestimate the amount of work and due diligence that is required on their behalf to get the job done right. Usually it is not just lack of experience but also a lack of education that causes the most difficulties. The first time apartment building investor should dedicate a good deal of time to finding a competent commercial mortgage broker who specializes in apartment buildings or other cash flow commercial real estate properties.
One of the most common errors that I see the novice investor make is to work with a broker who has little experience with commercial mortgages.
For example, I have seen many new investors decide to use the services of a mortgage broker who only has experience in residential mortgages. The new investor may feel comfortable with this residential mortgage broker because he or she has helped secure financing for the purchase of their primary residence or vacation home. Sometimes it is because the mortgage broker is the friend of the family or even a friend who has a mortgage brokerage license and maybe does four or five deals a year. This is someone who I would refer to as a “weekend mortgage broker”. The residential property investment boom of the past few years created quite a few of these enthusiasts. Unfortunately, by the time the new commercial real estate investor realizes that his “friend” is not going to be able to get the loan closed it is usually too late. This can be a costly mistake in the commercial real estate arena where the investor has to come out of pocket for considerable fees such as appraisal, environmental and upfront application fees.
Without the specific knowledge of the commercial loan application, submission and underwriting process there is a very good chance that a commercial loan proposal will be outright rejected by the lender or even worse, get buried under a bank officer’s stack of loans that will never even be considered because the loan package wasn’t prepared correctly. The specialized knowledge and experience of the commercial loan application, submission and underwriting guidelines is the major attribute that you need to look for in a good commercial mortgage broker.
The beginning commercial property investor should also look for a commercial loan broker that has the time to actually help him analyze the deal that he or she is submitting to determine if it is in fact a good investment.
Many first time investors get caught up in the excitement and hype of potential profits and become blinded to the risks and shortfalls of a property. In other words, they invest based on an emotional decision without performing all of the necessary due diligence. One encouraging fact is that banks and commercial lenders will not lend on a property that doesn’t make good sense financially. It is rare to find a commercial lender who will lend an amount that equals more than 80% of the property value. It is also uncommon to find a lender will lend on an apartment building with a debt service coverage ratio less than 1.20.
However, these generalized numbers mean little when it actually comes down to analyzing a property and finally submitting a loan package. Your commercial mortgage lender should have an intimate knowledge of the underwriting policies of each particular bank to determine where the loan scenario will fit best and stand the best chance of getting funded on time. For example, some banks will consider income generated from the rental of storage units and the income from laundry machines when computing gross income and some banks will not. A little detail like this can have a big impact on your debt service coverage ratio and the overall success of the loan proposal.