10-Unit Apartment Investing

[Hai G.]

Hi BP, 

I'm currently looking at a 10-unit apartment building with value-add opportunity. I'm fairly familiar with the economics, purchase process, and requirements of SFH and smaller multifamily (less than 5 units), but not so for 5+ properties that are considered commercial. Many other resources I read focus on bigger complexes. What are some tips for getting started and things to look for in the entire process? Would be especially interested in learning about rough ballpark figures for terms of bank loans as well.

Thanks!

Hai

[Brian Hughes]

Sounds like we may be in a similar place.   I've recently sold a smaller (duplex) property and ultimately plan to reinvest those proceeds in a larger property - probably 6-8 unit scale with preferred location anywhere from south of seattle through tacoma.   I could theoretically go a bit bigger probably,  but I'm being conservative since I suspect we will get statewide rent control in WA similar to oregon's statue next year,  so I don't want to overleverage myself.

From the talking with a couple commercial lenders I gather the main differences from1-4 unit financing are:

1) variable APR, usually with a lifetime maximum cap.

2) 15 or 30 year amortization rate (or some other options) but with a balloon payment after a much shorter term, like 5 or 7 years, meaning you MUST refinance or payoff at that time. (and that also means if rates have gone up past the APR cap, you are forced into a more expensive loan)

3)  Somewhat higher rates vs.  consumer grade loans.

4)  Minimum down typically 25%,  but see notes on DSR - in high cost / low cap areas like seattle thats the limiting factor.

5)  Many lenders have minimum loan size requirements - often $500K to $1M but some go lower.

6) No prepayment / accelerated paydown allowed without a penalty fee.

7)  No Fanny/Freddie consumer protections.   Its all private.   So you need to have a good idea who you are borrowing from so you don't end up doing business with vinny and guido from 'da family' out of new jersey.

8)  Terms for qualification differ from consumer loans,  they look more at the income/debt (DSR, or debt service ratio) on the subject property than at your own income,  but that said you still have to have minimum net worth (equal to loan value for lenders I have talked to),  prove you have experience managing rental property,  etc.  Right now a common value for DSR in seattle area seems to be about 1.25,   meaning ACTUAL income at point of sale after all expenses needs to be 1.25x the principal+interest payment

I did actually qualify for a commercial loan several years back when I was looking at possibly buying a 5-plex,  but I ended up going with a different opportunity and bought a 4-plex.   However the qualification process really wasn't scary,  it was just somewhat different things they looked at.  In some ways, easier.

FWIW one option to look for which can get you into 5+ scale without commercial lending is to look for adjacent 2-3-4plex properties being sold as a group,  and get individual 1-4 unit scale loans on each.

Good luck.