Apartment complex financing

[Adam Berlinberg]

I have an opportunity through sheer luck from a family friend to buy an apartment complex and not sure how to go about financing. It is 32 units and severely under market rent with a low purchase price reflecting that. After bringing to market rent, would generate around $35k a month in cash flow, before property management fees. I’ve never done commercial financing, and not sure where to start. I know it is much more difficult to get, but with a property like this seems like it could happen. Asking price is $1.5 million, which I was just preapproved for on the residential side for an investment property. Any thoughts?

[Arn Cenedella]

@Adam Berlinberg

Congrats!

On 5 or more units, it’s considered a commerical loan and the borrowers Debt to Income ratio is largely irrelevant. The property more than the borrower has to qualify for the loan. It the debt coverage ratio of the property that matters. Lenders typically will want to see net operating income (rent less all operational expenses but not including debt service) to be 1.2 to 1.25 times the loan payment. 

Lots of factors to consider here:

My initial reaction and asking price, I don’t believe agency debt will be the financing solution here. Agency loans are based on current property performance and require stabilized occupancy of 90%. In addition, there is a typical minimum size agency loan of $1M

Do you need to spend money to improve property to be able to increase rents?

Agency loans will not finance cap ex work.

My initial reaction from afar is that your best option would be a commerical loan from a smaller regional or local bank or credit union. They might include cap ex cost in the loan  figure 5 year term 25 year amortization no prepayment penalty.

Use this initial bank loan to acquire property, fixed it up, increase rents and then perhaps go for long term agency debt.

I own a MF assets from $1.1M to $35.5M.

In contract now to buy a new deal for $1.1M, we will get financing from a local credit union.

I suspect that will be your best bet.

Lender may have net worth and liquidity requirements too.

Get on the phone and start calling around, talk to five lenders.

Hope this helps!