Small Apartment Financing

[Justin R.]

Can someone please help explain guidelines for apartment loans. I just went under contract for a 6 unit multi fam in Michigan. My plan is to BRRR (buy, rehab, and then finance) this property. Are their min/max amounts to apartment loans, whats typical LTV, seasoning period, rates (in comparison to sfd investment loan), closing times? Has anyone used a lender they highly regard? Thank you

[Michael Manolides]

@Justin R.

As Todd mentioned, that can be a very competitive lending space as many banks have a surplus of CRE (particularly multifamily) loans relative to the other parts of their portfolio since that is where a bulk of the money has been in the past several years. The best place to look for this type of loan are local banks and credit unions.

I would not say there are min/max $$$ amounts. Anything with 5 units or more will be considered commercial but on loan amounts under roughly $1MM it can be difficult since national banks and government agencies will not want to do a loan that small unless there is a very compelling reason for it.

On LTV - In addition to LTV, commercial lending pays close attention to a DSCR or Debt Service Coverage Ratio. A typical number here is 1.25 (although it can range from 1.15-1.6+). What this means is that for every $100k in mortgage payments you need $125k in NOI to cover that debt. Typically local banks will lend on the LOWER of 75% LTV and 1.25 DSCR. In my neck of the woods almost everything is constrained by DSCR instead of LTV.

Seasoning Periods - Unlike 1-4 unit properties seasoning is not as cut or dry. I have seen refinances happen with as little as 3 months seasoning. What you do need to pay attention to here are prepayment penalties. On commercial loans there is often a penalty for refinancing before the loan is due. Just something to look for as you move forward.

Closing Times - I think 60 days is a good estimate for a conventional loan (ie. not hard money or a bridge loan).

Best of luck and let me know what other questions you have!