Apartment Building Investments & Financing

Here's the basic, simple, straightforward, plain English, real world, lowdown on getting your apartment building deals financed.
What you need (BEFORE you agree on a purchase price and decide to sign a contract).

1) Rent Roll
2) Last 2 - 3 years of property operating statements (P&L's)

Get these 2 items before you invest much time in the deal. Calculate total "possible" rent vs. actual rent to calculate vacancy rate. (Typically 5%-10%).
Take out depreciation, amortization and interest expenses from the P&L's and add those amounts back in to the Net Operating Income to get the true cash flow of the property (this is what a lender will do). You should see an expense factor of somewhere between 35% - 55% on most properties.

If you can't get P&L's before you sign a contract, make your purchase contingent on receiving these items within a certain reasonable time frame and that the contract is conditional on your review of the financials and them being deemed as "acceptable" to you. YOU decide the definition of "acceptable" .

If you're thinking of making an offer on a property without an actual rent roll or financials - see if you can get the "average" rent per unit and number of units. Subtract 5% for vacancy and 40% for expenses. Base your initial determination of the property's value and financability on those numbers. Still make any actual offer contingent on review and approval of the financials and contingent on financing approval if possible.

Market Rent vs. Actual Rent

Many experienced property managers and investors make the mistake of getting too excited about properties where the rent is way below market. The thought is - "If I were managing this property, I KNOW I could bring the actual rent up to market level within x amount of time". So you base your projections on market rent, instead of actual rent. BIG Mistake!! First of all, if actual rent is well below market rent - there's usually a reason - even if it's not apparent at first glance. Secondly, and most importantly, NO lender will base financing on "market" rent when there's a record of "actual" income for a property. Since a lender is ALWAYS going to look at actual rent in underwriting a potential apartment building loan - you might as well do it too.

MAXIMUM financing on multi-family properties

This will typically be 80% loan to value (purchase or refinance) - assuming borrower(s) have good credit (usually a minimum of 660 credit mid-scores for 80%) and the property has a debt service coverage ratio no lower than 1.15 (including any possible seller held 2nd). Regardless of income, most lenders won't approve more than 90% CLTV (combined loan to value including new 1st mortgage and a possible seller held 2nd). So even under the best of circumstances, without the absolute best of credit and HUGE cash reserves and extremely creative financing - you'll need 10% CASH down to purchase most apartment buildings + closing costs + generally at least 6 months of reserves to cover PITI payments. And this is assuming you have a property with 93% + occupancy and verifiable cash flow for the past 2-3 years. Vacant properties (or properties with high vacancy rates or below market rents), hotel/motel conversions and new construction will typically require more cash up front and larger reserves since these types of situations are considered HIGHER RISK to a lender.

Commercial financing boils down to INCOME. Income of the PROPERTY to be exact. The more verifiable income there is, and the longer the history of that income there is, the easier it is to finance. And the larger the percentage of the purchase price or appraised value you can finance. That's why new construction or "conversions" generally require more cash from the borrower. Because they have NO CURRENT INCOME to verify. And even the best and most experienced borrowers will have to subsidize the income of a property well beyond its construction completion date.

If a borrower is NOT experienced in property management, he or she will need to secure the services of an experienced property management firm to get approved for a loan. A 5% management fee is typically added in to expenses by a lender's underwriting department to calculate projected management expenses, EVEN IF YOU PLAN TO MANAGE THE PROPERTY YOURSELF. So you might as well figure that cost in as well. Don't think you'll be able to get a deal done with pro-forma cash flow projections that don't factor in this cost.

Some other basic things you may need along the way to get a "pre-approval" for financing ...

• You'll need to provide photos of the property. Photos will need to include interior photos of typical bathrooms and kitchens, not just exterior of the property.
• Personal Financial Statement for all partners in the project
• Sales contract or letter of intent
• Construction plans and specs (if any construction is involved)
• Construction contract (if applicable)
• Year to date financials on the property
• Market rent analysis
• Copies of actual leases
• Pro-forma projections (that take into account your NEW estimated financing)

For anything but an existing apartment complex, with average or better rents and vacancy rates, that has a verifiable 2-3 year income record - expect financing to be tough. 70% -75% maximum. This is why conversion projects or new construction are more difficult to finance. You'll need better credit, more cash, more experience and a better looking business plan and loan package to get these deals done.

We hope this brief overview of apartment and multi-family financing has been helpful. Our goal is to help you determine for yourself, whenever possible, if a deal makes sense, before investing too much of your time in it.
As always, we're available to assist you any way we can in assessing opportunities and securing financing in this area. Don't hesitate to contact Tony at (863) 298-8900 or Tony@CommercialLendingPros.com to discuss the particulars of ANY potential new deal.