Can You Buy An Apartment Building For No Money Down?

Too good to be true? If so, then it probably is. Watch your step and don't chase empty hopes.

Introduction

In this post, I want to debunk a common myth, which is the ability to purchase five or more unit multi-family buildings for less than 20% down. Before I get ridiculed by saying you can do seller financing or bring in a private investor for the gap funds, I'm well aware of the other creative financing strategies that one can use to lessen the amount of COOP (cash out of pocket) they need to bring to the closing table. This post is more in regards to senior debt, and acquiring a majority of the cash to purchase from a first lien debt lender. I wanted to debunk the myth that there are legitimate lenders who will let sponsors or guarantors come into a deal and put 10% down or less.

I speak with lenders on a daily basis and I have yet to see a deal that funds with less than 20% equity from the sponsors or guarantors on the deal. Many of the small balance commercial lenders that I use on a day-to-day basis have a 75% Max LTV cap with a handful of players coming in at the 80% LTV range. It is important to note that LTV is a direct correlation to risk for the lender in the commercial lending space, as it pertains to multi-family buildings and other commercial assets. Therefore, you will see a notable difference in pricing/terms between the 75% LTV products and the 80% LTV products. I want investors to be aware that 80% LTV usually isn't the norm and you won't get the optimal pricing with a 20% down loan, especially with a small balance direct lender. You will get the best deal in the 65% to 75% range especially when it comes to small balance direct lending (transactions in smaller markets and loans under $1mm) Loans above $1mm are generally agency loans, which are offered through Fannie Mae and Freddie Mac approved lenders, and those are commonly non-recourse and also 80% LTV, however, Fannie Mae and Freddie Mac have strict guidelines when it comes to the Metropolitan statistical area of where the property is located. If the property is located in a tier 2 or even tertiary Market, you're going to see an adjustment in terms and what loan products can be offered.

Let's Dive In

I see a lot of investors get wrapped up in the fantasy of buying a building for less than 20% down and pretending that there's some imaginary product out there that can grant them their wishes on a silver platter when they have no skin in the game. This is a dangerous mindset to fall into because it allows one to think that they can escape the necessary steps and sweat-equity involved in becoming an investor of high-caliber with the ability to purchase multi-family buildings and doing larger size deals. Many people think that they can just skip the rungs on the ladder and jump right to sophisticated and complex transactions. They think this because if they can get a loan for 90% LTV, then they can do the deal. However, this is simply not true and I have yet to see a loan product in existence in the current marketplace that has the capacity to fund a 90% LTV deal.

If there is a lender promising you that they can fund your deal at 90% LTV, then it is most likely a scam. I say this because many of these scam lenders require upfront non-refundable deposits that don't even get applied to third-party transaction costs. Common third party costs include title and appraisal fees. Scam lenders like to take a non-refundable deposit for issuing a conditional loan approval, which is downright unethical. Should you fall into their trap, you will most likely be out the money for whatever their fee is they are charging to “look at your loan.” I must emphasize that these lending practices are junk and should be avoided at all costs.

In addition to the above paragraph, I must further clarify that expense deposits are extremely common in every commercial transaction. Most commercial deals require an expense deposit that is allocated toward the appraisal and title cost, so that when the lender engages their legal and processing team, they are not stuck holding the bag if the transaction were to fall out. This way, the lender can pay the appraiser, title company, and any other real costs that the lender incurred by processing the loan up until the point of the deal falling through (if it happens).

Conclusion

My fellow investors, please take my word of caution and make sure you do not fall victim to the bad lending practices that are implemented by the scammers in the marketplace. Do your due diligence and make sure that the lender you have chosen has a reputation for closing business, not just charging upfront fees and then walking away from the deal.

Explain your confident stance in the comments. I would love to hear your thoughts, opinions, critiques, and suggestions for future content.