What are the “ins/outs” of acquiring financing to purchase a smaller (6 – 10 unit) Apartment Building?
Sep 22, 2009
in
Commercial Mortgage FAQ
I’m looking to purchase a 6 – 10 unit apartment building. My end goal is to move-in one of the units, and rent out the remaining units. I know that I will need to acquire a commercial loan for the purchase of a building this size, but I am not sure of the typical down payment requirements and other items used in qualifying a purchaser and the apartment building. Can anyone provide me with the ‘ins/out’ of this type of transaction? Thank you.
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2 comments
rich8259 on September 22, 2009 at 4:38 pm
As you are most certainly aware, lending has become far more difficult in the past year than ever before. The distinction between residential financing (4 units or less) and commercial financing (5 units or more) is that in residential you can put as little as 3% (you used to be able to put no down until the market collapsed) depending upon your income. In commercial, you will need a minimum of a 25% down payment but more likely a 30-35% down payment to assuage the lender.
This is because the lender needs to be comfortable that the amount of rental income the property produces will be able to pay the loan back.
When the lender underwrites the property for a loan, keep in mind that by living in one of the units, you have reduced the income the property generates which will limit the loan amount. I suggest you do not tell the lender your thinking about living in one of the units for this reason (you can always move in after you close).
The lender will then take the income from the units, subtract a vacancy factor (depending upon what part of the country you are in this can range from 5-20%), subtract your operating expenses including property tax, insurance, maintenance, utilities and reserves (to name a few) and that will produce your net operating income or NOI. The more the NOI, the higher the loan. The more the loan the less the down payment which is why it can range from 25-40% down.
Since it appears as though you are somewhat of a novice investor, make sure you have a loan contingency in your purchase offer that stipulates no more than a 30% down payment. If the lender requires closer to a 40% loan then it means they probably think you are paying too much. This is a rule of thumb and not necessarily always true.
Good luck!
Steve on September 22, 2009 at 4:38 pm
You need to speak to lenders that offer these types of loans. Usually the real estate broker that sells you the property can line you up with one or more lenders. The lenders typically categorize commercial loans as follows: Residential 4 units or less, residential 5 units or more (harder to finance than 4 or less), commercial stores or offices (harder than residential) and so forth. Typically it is harder to get this type of loan than say a loan on your personal residence because the lender may hold the loan himself rather than discount it with a secondary lender such as fanny mae. If he does discount the loan there are fewer financial institutions that will buy the loan.
As a result you will be required to put up more of a down payment and may have to pay more points (loan fees). The lender will also want to know projected income and expenses of the property and who knows what else. They will also want to do an appraisal and you will be required to pay for it.
However, don’t be discouraged’ if the property is worth buying I am sure you can get financing.