Apartment building financing can be unique with regards to deal structure, valuation and loans available. It’s not quite residential, but it’s also not quite commercial.
Here are a few critical aspects to consider and learn about with regards to apartment building financing.
What types of properties are considered apartment buildings?
Condos, detached homes, duplexes, triplexes and four plexes are usually categorized as one-to-four unit properties. Properties that possess 5 or more units are classified as apartment buildings.
What are the most important metrics when looking for an apartment building loan?
Before approving an apartment loan, most lenders will want to have in-depth knowledge about the experience of the borrower as a rental property manager or owner. They will also want to know specifics about the property metrics.
The most critical property metrics include:
- Net operating income: The annual earnings, minus expenditures that a property produces from its operations.
- Debt service coverage: A ratio involving cash flow relative to debt payment obligations.
- Loan-to-value ratio: An appraisal of the loan sum relative to the value of the property.
Apartment building loan terms & types:
Apartment building loans can be long-term (25 or thirty years) or short-term (3, 5, 7 or ten years). Interest rates can be fixed, variable or hybrid. Short term financing can typically be done with little or no prepayment penalty. Longer term options typically will carry some sort of prepayment penalty. Many bank loans have a 5 year walk down type of prepayment penalty, something like 5%, 4%, 3%, 2%, 1%.
Loan amounts on apartment building financing can vary greatly. Many institutional lenders require a minimum loan amount of $500,000. Loan-to-value ratio top out at seventy or seventy-five percent of value, although in some situations that LTV ratio can be slightly lower. A lower loan-to-value can translate into a lower rate in some situations.
As soon as the decision to apply for an apartment building loan has been made, the borrower needs to gather all the paperwork that will be required. The documentation may include:
- Photos of the property
- Property descriptions: year of construction, lot size, number of units & existing amenities.
- Plans for upgrades such as plumbing, light fixtures, dog park, kid’s playground, and how much those improvements will cost.
- Copies of floor plans
- Previous year P&L as well as current YTD P&L or operating statement
- Rents and how much they’ll be raised or lowered
- Rental or lease agreements
- Purchase price & closing costs for purchases
- Contingency fund amount
- Loan amount & cash equity amount
- Names of realtors, attorneys, title companies, and other professionals engaged in the process.
We hope you find this info useful when looking for an apartment building loan. For more information, contact All California Lending, or visit them online at https://www.acalending.com/apartment-building-financing-california/. All California Lending specializes in helping their clients obtain the funding they require. Whether it is private money options or long term bankable options, they can help with your apartment building financing needs.