Apartment Building Financing – 6 Tips for First-Time Borrowers

 January 26, 2019

This Assets America® guide provides advice and tips for those looking for apartment building financing, apartment complex financing or multifamily property financing.  First, it’s easier than you might think to invest in an apartment building or complex.  And, if you’ve ever been involved in rental property, you can handle the construction or purchase of an apartment building.  And better yet, you can profit from flipping it or extracting long-term rental income from it.

Tip 1:  Understand the Property’s Income Potential

Your apartment building provides economies of scale.  It offers living spaces for many households, and each one will be paying you a monthly rent.  If you are eyeing the purchase of an apartment building, you will need to review the building’s rent roll.  The rent roll is a list of all existing tenants along with important details about their leases.  In this way, you’ll know what to expect for gross monthly income, distribution of lease terms, and the occupancy percentages.  From this information, you can estimate rent increases for the upcoming 12 months and expected vacancy rates.  You’ll use this information to formulate an estimate of net operating income (NOI), which is income minus expenses.  Once you have calculated your NOI, you can start evaluating how much you would pay for the building.  From there, you can calculate how much you will need to borrow.

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Commercial loans for residential, industrial, and multifamily properties

Tip 2:  Use a Loan Broker

Buying an apartment building or apartment complex is a large undertaking requiring significant financing.  What you might not realize is how important it is to obtain the best financing possible.  This is because anything less will cost you money year after year.  Critically, you must understand that loan offers can vary greatly from one lender to the next.  Certainly, there are some overall rules of thumb governing apartment building financing.  This includes a requirement for at least 15% equity (down payment) and usually more. 

However, each offer will have its own unique features.  Whether it involves interest rate, prepayment penalty, amortization period and so forth.  Only a loan broker can provide you one-stop access to multiple offers.  This, of course, is coupled with support from the broker to vet and polish your application.  Trying to comparison shop among banks and private lenders is extremely difficult.  It is also extremely time-consuming, and complex, assuming you even have access to the private lending community.  Assets America® exposes your application to our network of private lenders and banks that will compete for your business.  And ultimately, that can greatly improve your profit potential.

Tip 3:  Government-Backed Loans Are Slow

If you are looking for a relatively small amount of apartment building financing, you might consider a government-backed apartment loan.  However, in many cases, these loans suffer two defects:

  1. You must contend with the extraordinary amount of requested and required paperwork.  Most of the programs require an inordinate amount of detail.  And if any of the paperwork and documentation is greater than 90 days old, updated documentation is required.  With the exception of an appraisal which is considered valid for 180 days. 
  2. Funding time can be longer than traditional financing methods.  The funding time for a government-backed loan can stretch out over as much as half a year.  For many investors, this is an unrealistic timeframe.  When compounded with the limits on apartment building financing amounts, government-backed apartment loans may not be the preferred choice.

Tip 4:  Be Aware of Recourse Loans

Certain apartment building financing loans require that you assume personal liability, otherwise known as full recourse, if financial difficulties arise.  These are known as recourse loans, and they function to ease access to credit for those that would otherwise not qualify.  In a recourse loan, if you default on your apartment building loan, the lender can sue you.  They can sue you in court both corporately and as an individual.  Lenders can seize your personal assets to help satisfy the debt. 

This is not to say that you should rule out recourse loans.  Especially if most of the financing options available to you are recourse loans.  In fact, most commercial loans are full-recourse loans.  But all things being equal, you can always ask your broker to obtain for you a non-recourse loan.  That is, if it’s available for your unique financing situation.  On average, expect that you will be required to sign a loan with a personal guarantee (a “PG”) for your apartment building financing.

Tip 5:  Use a Short-Term Loan for Rehab Projects

Frequently, you’ll need to rehabilitate or renovate an apartment building after purchase.  Let’s say that your plan is to retain the property for cash flow income.  Therefore, you should not limit your thinking to long-term financing.  In some cases, it may be a better to start with a short-term private money or hard money loan.  Especially if the private money is interest only and the interest rate difference is not too great.  By using this type of apartment building financing, you may be able to minimize your debt service during a period when you are actively spending cash.  Naturally, you’ll convert to longer-term, lower interest rate debt once the property stabilizes.  A loan broker can help you smoothly transition from short-term to long-term apartment building financing.  If your aim is to fix and flip, you can pay off your short-term loan with the sale proceeds. 

Tip 6:  Understand the Advantages of Apartment Complexes

There are several advantages of apartment complex financing over less-dense multifamily property financing.  With apartment buildings and complexes, you receive recurring income diversified across multiple units.  A problem collecting rent from one tenant has a lesser impact when you have many tenants.  Apartments also provide lower maintenance costs per unit, thanks to shared facilities (such as one roof).  This lower maintenance is also due to the relatively compact footprint.  You also might be able to create additional source of income beyond rents, such as vending machines, ATMs, parking space rental, laundry/dry cleaning, billboard advertising, pet care, entertainment facilities and even an on-premises bar or restaurant. 

Also, you might consider renting premium appliances or providing concierge services for an extra fee.  Of course, maintaining a high occupancy rate is key to unlocking these advantages.  This means that you must provide a fairly high-level of services to maintain tenant satisfaction.

Assets America® Offers Apartment Building Financing

Assets America® offers more than just apartment building financing.  We work diligently to get you the best possible terms.  And, we can greatly enhance your loan application through our greater than three decades of commercial funding experience.  We can even offer Advisory Services for those who prefer this mode of interaction!

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Ronny was a pleasure to work with and is extremely knowledgeable. His hard work was never ending until the job was done. They handled a complex lease and guided us through entire process, including the paperwork. Not to mention a below market lease rate and more than all the features we needed in a site. We later used Assets America for a unique equipment financing deal where once again Ronny and team exceeded our expectations and our timeline. Thank you to Assets America for your highly professional service!

exp MFGroup
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Assets America guided us every step of the way in finding and leasing our large industrial building with attached offices. They handled all of the complex lease negotiations and contractual paperwork. Ultimately, we received exactly the space we needed along with a lower than market per square foot pricing, lease length and end of term options we requested. In addition to the real estate lease, Assets America utilized their decades-long financial expertise to negotiate fantastic rates and terms on our large and very unique multimillion dollar equipment purchase/lease. We were thankful for how promptly and consistently they kept us informed and up to date on each step of our journey. They were always available to answer each and every one of our questions. Overall, they provided my team with a fantastic and highly professional service!

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Assets America was responsible for arranging financing for two of my multi million dollar commercial projects. At the time of financing, it was extremely difficult to obtain bank financing for commercial real estate. Not only was Assets America successful, they were able to obtain an interest rate lower than going rates. The company is very capable, I would recommend Assets America to any company requiring commercial financing.

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Allan E.
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My business partner and I were looking to purchase a retail shopping center in southern California.  We sought out the services of Ronny, CFO of Assets America.  Ronny found us several commercial properties which met our desired needs.  We chose the property we liked best, and Ronny went to work. He negotiated very aggressively on our behalf. We came to terms with the Seller, entered into a purchase agreement and opened escrow.  Additionally, we needed 80 percent financing on our multimillion-dollar purchase.  Assets America also handled the commercial loan for us.  They were our One-Stop-Shop. They obtained fantastic, low, fixed rate insurance money for us.  So, Assets America handled both the sale and the loan for us and successfully closed our escrow within the time frame stated in the purchase agreement.  Ronny did and performed exactly as he said he would. Ronny and his company are true professionals.  In this day and age, it’s especially rare and wonderful to work with a person who actually does what he says he will do.  We recommend them to anyone needing any type of commercial real estate transaction and we further highly recommend them for any type of commercial financing.  They were diligent and forthright on both accounts and brought our deal to a successful closing.