Offer accepted on 16 units, now what to do for financing?

Multi-Family and Apartment Investing
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Offer accepted on 16 units, now what to do for financing?

Jim Wilder
Gordonsville, VA · Member since 2016 · 4 posts · 0 votes

I'm a true newbie and just had my first offer accepted on a 16 unit apartment complex. It was listed for $723K and offer was accepted for $675K. So... how does the financing work? Is it based on projected income of property? I'm looking to let the property pay for itself and want to use a minimum down payment. All the units are full and it has a property manager with a waiting list for more wanting to rent. Property is located in Waynesboro, VA.

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Michael Core
Wholesaler · Douglasville, GA · Member since 2014 · 21 posts · 6 votes
10y

Based on your questions, it sounds like you need to do some quick analysis ASAP so that you can have an intelligent conversation with the bank. 

Most banks will be looking at the net income of the property and the debt service coverage ratio (DSCR). This is how many times the net income of the property will cover the loan payments. Many banks are going to want a minimum of 1.25, meaning the annual net income divided by the annual mortgage payment should be 1.25 or more. I would estimate the mortgage payment by running scenarios of how much the payments would be at 20 or 30% down (typical required deposits) and using whatever the interest rates are for those types of properties in your area (ask a mortgage broker).

Make sure when you calculate the net income, you account for some vacancy (the property manager should know what the rate is for your area) despite the fact that the property is currently at full occupancy. Also account for normal operating expenses, estimated property taxes (as these will probably be higher than what the previous owner was paying, due to the sale) and reserves for ongoing repairs as the bank will be considering these factors also.

Hope this helps and best of luck with your deal!

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  • Adrian StamerPro Member
    Real Estate Investor & Agent · Richmond, VA · Member since 2013 · 319 posts · 167 votes
    10y

    Hey Jim

    I do some biz in this area though based in Richmond. In the future I would suggest figuring out the financing on something this size first, but since you've dove head first in you need to start contacting small local banks in the area and see what their requirements are

    2Reply
  • Account Closed
    Oxnard, CA · Member since 2016 · 44 posts · 12 votes
    10y

    Congrats on the offer being accepted.  Do you have any contingencies in the offer if you are not available to find financing?  

    0Reply
  • Lori Valene
    Rental Property Investor · Kent, WA · Member since 2014 · 83 posts · 27 votes
    10y

    Can you get owner financing? Or only bank loans. If you have an Umpqua Bank. They seem to be loaning out more than others. Or like Adrian Stamer said, small local banks are more willing to help local people on local deals. Question, did you have to beat out other offers? Just hope you didn't go to high.

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  • Adrian StamerPro Member
    Real Estate Investor & Agent · Richmond, VA · Member since 2013 · 319 posts · 167 votes
    10y

    Union bank, city bank, and first bank of Virginia are the banks I can think of off hand. That property sat for a very long time on the market, at that price I would get ready to start raising those rents asap. They are below market but the units are pretty small. 

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  • Account Closed
    Lender · Dallas, TX · Member since 2015 · 283 posts · 128 votes
    10y

    Adrian - Congrats, I assume you have some idea of how much debt and down payment you are looking to do. Depending on you ltv and equity, you can focus your financing search on lenders/investors that will meet that criteria. A commercial mortgage broker can be very helpful and they can get you access to lenders across the country so that you can have a very broad range of options to choose from. PM if you need some referrals. 

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  • Jim Wilder
    OP
    Gordonsville, VA · Member since 2016 · 4 posts · 0 votes
    10y
    Originally posted by @Adrian Stamer:

    Union bank, city bank, and first bank of Virginia are the banks I can think of off hand. That property sat for a very long time on the market, at that price I would get ready to start raising those rents asap. They are below market but the units are pretty small. 

     Thanks for the quick response and contacts!

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  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    10y
    Since it is 16 units, it will be commercial financing. They typically have minimum down payment of 25%. You may be able to get down to 20% other option is owner financing or bring in a partner. How much money do you have set aside for a down payment?
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  • Russell BrazilBusiness Member
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    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    10y

    Im curious as to what method you used to find the property. Ive been sort of looking through the midatlantic for 15-50 unit buildings.

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  • David Repka
    Lender · Saint Petersburg, FL · Member since 2016 · 6 posts · 4 votes
    10y

    Congrats on getting your offer accepted. For loan amounts under $1 million your best bet is to go to a local, community bank or credit union that knows the market. For loan amounts greater than $1 million national lenders that conform to the FreddieMac small balance program can offer pretty compelling rates and terms. 

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  • Jeff F.
    Rental Property Investor · WY · Member since 2016 · 243 posts · 221 votes
    10y

    You may want to check your local wells fargo (Do you have them in VA - maybe a former wachovia?)

    They are letting me do 20% down on a 7 unit building, 15 year term amortized over 25 years, with a balloon at year 15. 

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  • Jeff F.
    Rental Property Investor · WY · Member since 2016 · 243 posts · 221 votes
    10y

    You may want to check your local wells fargo (Do you have them in VA - maybe a former wachovia?)

    They are letting me do 20% down on a 7 unit building, 15 year term amortized over 25 years, with a balloon at year 15. 

    0Reply
  • Chris Jackson
    Investor · Chambersburg, PA · Member since 2016 · 108 posts · 23 votes
    10y

    @Jeff Fruhwirth on that financing that you got, how are you going to make that balloon payment in 15 years? I know that is a long time away but I suspect you probably already have some ideas?

    0Reply
  • Alex Hobbs
    Middletown, DE · Member since 2015 · 52 posts · 11 votes
    10y
    Chris Jackson I believe most people refinance with another lender or sell to cover the balloon. That is how I look at deals with a balloon payment.
    0Reply
  • Michael Core
    Wholesaler · Douglasville, GA · Member since 2014 · 21 posts · 6 votes
    10y

    Based on your questions, it sounds like you need to do some quick analysis ASAP so that you can have an intelligent conversation with the bank. 

    Most banks will be looking at the net income of the property and the debt service coverage ratio (DSCR). This is how many times the net income of the property will cover the loan payments. Many banks are going to want a minimum of 1.25, meaning the annual net income divided by the annual mortgage payment should be 1.25 or more. I would estimate the mortgage payment by running scenarios of how much the payments would be at 20 or 30% down (typical required deposits) and using whatever the interest rates are for those types of properties in your area (ask a mortgage broker).

    Make sure when you calculate the net income, you account for some vacancy (the property manager should know what the rate is for your area) despite the fact that the property is currently at full occupancy. Also account for normal operating expenses, estimated property taxes (as these will probably be higher than what the previous owner was paying, due to the sale) and reserves for ongoing repairs as the bank will be considering these factors also.

    Hope this helps and best of luck with your deal!

    3Reply
  • David Zheng
    Investor · Saint Louis, MO · Member since 2016 · 970 posts · 1k+ votes
    10y

    How do people accept offers without getting a Pre-Qual letter or anything....I don't get it

    1Reply
  • Darryl Dahlen
    Commercial Loan Officer · Southern Maine, ME · Member since 2009 · 782 posts · 415 votes
    10y

    Unlike the residential world, you cannot obtain a pre-qual in the commercial arena since the loan is based on the financials of the property. Without specific numbers to look at or a property/market to analyze it's impossible to obtain a pre-qual.

    As mentioned, look at Wells Fargo. They have a terrific small balance program, but expect 25% down.

    1Reply
  • Cristo Heatherdale
    Lender · Denver, CO · Member since 2015 · 21 posts · 9 votes
    10y

    What's the CAP? Do you have a pro forma already? As stated above, generally commercial lending does require about 25% down. I don't know what your credit score is or if you established business credit, but 650 is about the minimum you would need as well.

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  • Richard Copeland
    Houston, TX · Member since 2016 · 92 posts · 21 votes
    10y

    David Zheng.  It sounds like you are a residential guy.  This deal falls under commercial status.  In commercial real estate there are no pre-qualifications.  That's a residential practice.  Financing for commercial and multifamily recourse loans depends as much on the property as it does your financial position.  With residential you can get pre-qualified based on your income alone.  For commercial and multifamily lenders are deal specific.  Thus the pre-qualification letter you receive for the residential home can be used for any house in the financial bracket.  Commercial lenders don't pre-qualify, they provide term sheets based on that specific deal.  A lender may have interest in a million dollar deal on one side of town and offer you terms.  But you can find a similar deal on another side of town and a lender may have no interest at all or offer you total different terms all together.

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  • John Broussard
    Lender · Houston, TX · Member since 2008 · 252 posts · 60 votes
    10y

    The income is what determines what the value of the property is, to calculate you need to know the NOI and cap rate. NOI divided by cap rate = property value. Commercial properties require 20 to 25% downpayment.

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  • Chris Cambridge
    Investor · New York, NY · Member since 2008 · 187 posts · 36 votes
    10y

    Jim the real question for you to answer is what is the NOI? Then figure the DSCR. From there you do a quick test on your expected rates and amortization. Does minimum DP really means 100% for you? I see it used in the same sentence as pay for itself! I hope your offer was not based on proforma because no one will finance you based on projected income. Lastly cash is king. Lender says they'll do it at 75% then be sure to have reserves to service the debt for at least 6 months or 10 of purchase price left over. That's my 2c!

    0Reply
  • Jim Wilder
    OP
    Gordonsville, VA · Member since 2016 · 4 posts · 0 votes
    10y

    Thanks for all the help, luckily I have a contingency to get out if I can't find suitable financing. It's a great property with $7050 income and ~$1700 monthly costs + P&I.  I found the property on Realtor.com

    0Reply
  • Donald Stone
    Lender · Tampa, FL · Member since 2014 · 206 posts · 4 votes
    10y

    Jim I know you have received a lot of advice on your posting but if you want simple honest lending facts we should have a short discussion.  I have lenders for any situation including yours.

    thanx...

    0Reply
  • Jim Wilder
    OP
    Gordonsville, VA · Member since 2016 · 4 posts · 0 votes
    10y

    Well, number crunching shows the following:

    Maybe its not such a good deal after all, depending on my down payment.

    0Reply
  • Conor Freeman
    Lender · San Diego, CA · Member since 2015 · 88 posts · 57 votes
    10y

    @Jim Wilder I would use a 30 year amortization schedule. You're likely going to see 5, 10 or 15 year terms set over 30 instead of 20. I used a higher interest rate and see your DCSR much higher than your calculations. PM me if you want to discuss. Looks like a nice deal.

    0Reply
  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    10y

    DSCR calculation appears wrong. Expenses appear too low. May want to run your figures through a deal analyzer...BP has one. We can help as well.

    0Reply
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