Despite the massive liquidity, the real estate scenario in the US is yet to experience more bearish seasons on the whole. But there is one particular section that seems to remain unaffected by the deflations of our economy - Apartment Buildings.
Apartment buildings are gaining a lot of momentum due to exceptional levels of occupancy. As a result, lenders are more than happy to grant apartment loans. Thanks to the easy availability of credit and stellar returns, many investors have put their money in these buildings.
If you are a newbie to the commercial side of real estate, you will most likely want to know as much as you can. Do not worry, we are here for that!
What are Apartment Loans?
These are the financing options which fund the purchase or sometimes even renovation of an apartment building. Investors use these loans to buy properties that build equity, earn capital gains, generate positive cash flow, and increase leverage.
One thing worth mentioning is that the proceeds from an apartment loan can only be used for an apartment building. Many people believe that any building with apartment units is an apartment building. Well, that is not really the case.
Technically, an apartment building is a property with 5 or more residential units. It might not sound like much, but this distinction is rather important as your financial options vary significantly when you move from a 1-4 unit estate to a 5 or more unit apartment building.
This also means that apartment complexes, condos, detached homes, duplexes, and single-family units do not fall under this category. If you are interested in any of these 1-4 unit estates, then you need to look at multifamily financing.
Furthermore, an apartment building can also have some commercial space. Nevertheless, it is usually limited to 10%-35% of the building’s total square footage. In case it crosses the 35% benchmark, then it is deemed as a commercial property, which again has different loan terms.
Who can take one?
Due to the tremendously high cost of apartment buildings, loan providers are a bit skeptical about who secures a loan. This forces them to keep the bar for approval a bit higher. If you are looking for financing a 5+ unit estate, then you need to fulfill the minimum requirements:
- Personal FICO Credit Score –Over 650;
- Debt Service Coverage Ratio (DSCR, which shows available cash flow in relation to debt payment) – Should be more than 1.15;
- Liquidity – 9+ months;
- Net Worth – In some cases, collective net worth should exceed loan amount;
- Occupancy Rate – Over 85%;
- Seasoning – 90+ days.
Classification of Apartment Loans
Apartment Loans are granted by government agencies, credit unions, banks, and so on. Government institutions such as Fannie Mae, Freddie Mac, & the FHA account for 44% of all loan originations while national lenders provide a little over a third (37%) of the same. Finally, regional and local banks originate the remaining 19%.
Broadly speaking, there are three major types of loans which investors can use for financing apartments, namely:
- Government-backed Apartment Loans
- Bank Balance Sheet Apartment Loans
- Short-term Apartment Financing
Let us take a minute to understand and discuss these options at a greater length.
- Government-backed Apartment Loan
As the name suggests, these loans are offered by Fannie Mae, Freddie Mac, and the FHA. These agencies offer the maximum loan-to-value (LTV) ratio and can finance up to 87% of the total purchase price of the desired property.
What makes these loans one of the best financing options is the fact that government grants them to expedite economic development and promote job creation, not for making money, of course. This provides the investors with an affordable, efficient, and reliable funding option.
Loan Amount – Minimum $750k with up to 87% LTV;
Interest Rate – 3%-6%, fixed or variable;
Credit Score Requirement – Over 650.
- Bank Balance Sheet Apartment Loan
These loans are originated by banks and are not backed by any government agency. Many investors choose this option because government-backed loans require ‘local ownership’ of the property, which basically means the investor should be a resident of the area. On the other hand, banks accept ‘absentee ownership’, which makes them the obvious choice for many people.
Additionally, these are ‘recourse’ in nature which not only hold the borrowers personally liable but also make these loans easier to qualify. Whereas government-sponsored loans are ‘non-recourse’ in nature that shields the borrower, keeping only the building at risk. Hence, the bar is set on the higher side.
Loan Amount – Minimum $500k with up to 80% LTV;
Interest Rate – 3.7%-5.7%, fixed or variable;
Credit Score Requirement – Over 640.
- Short-term Apartment Financing
It is not a very popular financing option as most buyers look at apartment buildings as a long-term investment. However, they can be helpful if someone needs a little help for rehabilitation, renovation, or simply to buy some time for meeting other requirements of the long-term or permanent loans. Investors often refinance to their longer counterparts once the term ends.
Loan Amount – Minimum $100k with up to 90% LTV and 75% LTC (loan-to-cost) ratio;
Interest Rate – 4%-12%, fixed;
Credit Score Requirement – Over 550.
That is all for now folks! We hope this post cleared most of your doubts regarding apartment financing. If you are thinking about investing in an apartment loan in Rancho Cucamonga and want to know about the amount and rate you qualify for, contact us. You can give us a call on (909) 377-3137 or drop a mail at email@example.com