What Type Of Loans Should I Inquire About For A 7 Unit Apartment?

Question

I'm Interested in purchasing my first multifamily. It consists of seven units and has a cash flow of about $5500 before all costs.

What type of loans should I inquire about? Do most investors just apply at there local bank? What are the terms?

Anthony Dooley · Answer

My local bank looks for 25% down on a commercial loan and carries for 15-20 years. Your net income needs to be at least 1.25 % of your monthly debt payment.

You need to understand how to calculate the Net Operating Income and you need to know the prevailing Capitalization Rate on commercial property in your area.  6% CAP would be more expensive than a 7%. $5,500 "before all costs" sounds like your gross rents. That means each unit is currently rented for $785?

Ask the listing agent for a trailing 12 months of income and expenses. This will show you the NOI. The NOI divided by the cap rate give you the approx. value not including any renovation that needs to be done.  5500 x 12 = 66,000 per year gross. Expenses should be about 45%, which is $29700 NOI.  NOI divided by CAP rate = value.  At a 6% CAP, it should be valued at $495,000.

Nathan Click · Answer

@Marshall Zakarian - The type of loan you need depends on what your goals and objectives are.  If you plan to do renovations and significant rehab work then you may consider a bridge loan.  On the other hand if you are seeking to buy and hold then you'll need more permanent financing.  Commercial loans come in all shapes and sizes and rates very drastically from one type to another.   Answering this question depends on what your plan is for this property.  Local banks, buy and large, are not the best place for commercial real estate loans.  You'll want to consult a few non-bank commercial lenders.  If you need any other information feel free to reach out me.

Karen Schimpf · Answer

Construction depends on experience, reserves, and the total project cost etc.  On your first project, you will most likely need to partner up with someone whom has experience building apartments.

Marshall Zakarian · Answer

Hi Karen,

The property is located in my city and I took your advice and contacted the local banks. They suggested that they don't provide 20-25 year amortization and only 10-15 years which I'm not interested in.

I will be contacting a commercial mortgage broker this afternoon and see if they provide a better rate.

Lastly, the apartment building has a large lot next to that is currently being using for parking but usually is 3/4 vacant since its huge. I contacted the city to see I can rezone the lot and they said it can be rezoned. After purchasing the building, how can I take loan against the property and when to build more units next it?

THANK YOU

Karen Schimpf · Answer

@Marshall Zakarian The property you are looking to purchase, is the apartment located in the same town or area you live?  If you live in the area, you can go to a local bank. Local banks can finance the smaller loan amounts.  Local banks typically are 75% LTV, with a 5 year fixed, 20 year amortization.  For a 25 year amortization, you and  the deal has to be very strong.

If you do not live in the area that you are purchasing, than I suggest you reach out to a Commercial Mortgage broker.  Commercial Mortgage Broker's have 75% LTV (maybe 80% LTV if you and the deal are strong) with a 5 year fixed with a 30 year amortization.  If the deal loan amount is  $1MM+ (there exceptions to the loan amount) than there are 7 year fixed and 10 year fixed with a 30 year amortization.  Be aware that if the loan is fixed for x period, than the pre payment penalty will last as long as the fixed period.

Lastly, I noticed you did not mention the expenses.  Expenses are critical in factoring if the deal is doable.  The selling agent should be able to provide a P&L which will show the cost of RE Taxes, Insurance, Utilitities, Maintenance, repairs, cleaning, Management fees, advertising legal etc.

Bill Hamilton · Answer

5 year balloon means the entire, unpaid balance of the loan is due after 5 years even though the amortization period is over 20-30 years. For example, if you had a $100k loan at 5%, amortized over 20 years, your monthly Principle and Interest payment would be $659.96. If it was a straight 5 year loan, amortized over 5 years, then your payment would be $1,887.12 per month instead. On the 20 year amortization, you would owe $83,454.86 at the end of 5 years and that amount would have to be either paid off or refinanced at the end of that 5 year period.

Brian Linton · Answer

hey what do you mean by 5 year balloon?

Anthony Dooley · Answer

$33,287 divided by $350000 = .095 or a 9.5% cap rate. This sounds really good. It may be in a bad area of town, so I hope you know the area.

I would make a full price offer with financing contingency, physical inspection contingency, and due diligence on their accounting records to verify their numbers (which are never as good).  Any discrepancies that you find gives you a chance to ask the seller to reduce the price or remedy the problem prior to closing. You can improve the property, but not the zip code, so keep your exit strategy in mind. You will need 25% down. Your annual debt the first year will be about $15,000. That leaves you $17,000 cash flow, so it will take about 5 years to get your down payment back unless you can add value and refinance after a year or two.

Anthony Dooley · Answer

Disregard my last post. I was thinking of a different question from someone else. sorry

Anthony Dooley · Answer

@Marshall Zakarian that NOI can't be right. I will assume that is per month, which would make sense. $399,444 per year would be the NOI.

What Type Of Loans Should I Inquire About For A 7 Unit Apartment?

Most Popular Reply