Financing an apartment building can be done in several ways. Apartment loans are a type of multi-family financing that assists with the purchase or refinancing of an apartment building. These include loans that are government-backed, offered by a bank or other lending institution, or offered on a short-term basis. Each has varying terms of eligibility and can provide for various property acquisition, construction, or renovation needs.
Key Takeaways:
- There are various apartment building financing options for potential investors, whether they be first-time owners or experienced real estate investors.
- Rates and terms associated with each apartment loan type will vary based on factors such as credit score, property location, and owner-occupancy stipulations.
- Existing apartment buildings needing repairs or renovations can also be funded by utilizing apartment complex financing.
Government-backed Apartment Loans
There are a few loan types available that are government-backed, each of which is supported by different entities. These entities are:
Fannie Mae offers programs that support up to $100 million in financing, require a maximum loan-to-value (LTV) of 80%, and have up to a 30-year amortization period. Properties also must have stabilized occupancy (typically 90%) for 90 days prior to funding. These offer favorable interest rates and terms but require certain net worth standards to be considered eligible. These also have certain restrictions on commercial usage, if applicable.
You can reference Fannie Mae’s multifamily term sheet for more detailed information.
Programs offered by Freddie Mac are popular for their low rates and flexible term options, with amortization of up to 30 years. In particular, its Small Balance Loan offers financing up to $7.5 million. However, these also require certain net worth standards to be considered eligible.
You can reference Freddie Mac’s Small Balance Loans term sheet for more detailed information.
Insured by the Housing and Urban Development Department (HUD), FHA apartment loans favor experienced investors and better suit large projects. Loan amounts can vary but usually start upwards of a few million dollars. These loans also take longer to close, usually within six months to a year, and have an amortization period of up to 35 years.
For further information, you can refer to HUD.gov to make sure your project meets the requirements.
These loans tend to have slower funding times than other types and can take months before disbursement. Qualification requirements can also be more rigorous when assessing the creditworthiness of you and your business. However, it’s worth the wait for the benefit of lower interest rates (which generally start at 5%) that can be either fixed or variable.
Maximum loan amounts are dependent on how many units are in the building and vary per entity. Generally, loan terms are flexible, and can have terms of up to 30 years for Fannie Mae and Freddie Mac, as well as 35 years for FHA loans. Repayment can vary and include interest only or monthly principal and interest payments.
There are some elements of government-backed loans that may be applicable depending on the loan type. When shopping around for a program, keep an eye out for:
- Minimum occupancy requirements
- Recourse obligations or carve-outs
- Assumable mortgages
Bank Balance Sheet Apartment Loans
Bank balance sheet loans are issued by a lending institution, such as a traditional bank or online lender. For those who don’t meet the requirements of a government-backed loan, obtaining financing through a bank balance sheet loan is standard and can help bridge the gap to purchase, refinance, or renovate an apartment complex.
These loans tend to have more flexible financing options, as the borrower is personally liable—therefore allowing for larger loan amounts and making them easier to qualify for. That being said, higher interest rates can be applicable, typically ranging anywhere from 5% to 8%, which can be either fixed or variable. The disbursement timeline is a bit quicker, and funds are usually received within 30 to 45 days. Loan terms are dependent on the borrower’s needs and range anywhere from 5 to 25 years.
Since apartment building loans can be a costly endeavor, financing via a lending institution can provide greater flexibility and limited restrictions. For instance, this is likely the most suitable option for borrowers utilizing a loan to finance an investment in which they don’t reside, as stipulated by some government-backed loans.
Short-term Apartment Loans
Short-term apartment loans can be used to renovate or repair an existing apartment building. They’re a more costly option for borrowers who may not qualify for traditional financing. Notably, these loans are only sustainable for temporary purposes and should only be considered as a last resort option because of their higher interest rates and fees. However, they are useful in the case of quick disbursement and flexible fund usage.
There are typically two options to choose from; a hard money loan or a commercial bridge loan. Both offer various uses and have similar qualification standards that are typically easier to meet. Loan amounts depend on the loan-to-cost percentage of the property and will vary per lender.
Generally, these loans have a maximum repayment term of 12 to 36 months. Due to the quick repayment turnaround, interest rates are higher and typically range from 6% to 15% and up. Loan funds are disbursed swiftly, usually within 7 to 30 days. A major benefit of quick disbursement times for short-term loans is that it allows the borrower to compete with cash offers.
Upon expiration of the loan, the loan can be refinanced or the property can be sold. This is a common tactic used by investors who flip properties for profit, who acquire and sell in a short timeframe.
Who Apartment Financing Is Right For
Like getting any other small business loan, apartment loans can provide funding for various opportunities and investments to help your business grow. Apartment loans may be especially useful to investors who are:
- Looking to make a real estate investment: Apartment financing can help facilitate the purchase or construction of multi-family housing for first-time owners. Check out the types of multi-family financing for more information.
- Have an existing real estate portfolio: Apartments loans can be a great option for businesses looking to expand their real estate portfolio. This can actually be to your benefit if you have a strong track record of investments and can use it as leverage to obtain favorable commercial real estate rates and terms.
- Looking to renovate or repair an existing apartment building: Apartment financing can also provide funding for short-term uses like renovations or repairs of an existing apartment building. This is also beneficial to fix-and-flip investors who are looking to make an investment and sell the building once renovated.
Pros & Cons of Apartment Financing
| PROS | CONS |
|---|---|
| Multiple financing options can provide access to various real estate investment opportunities | Can be considered high-risk in comparison to other real estate loan types |
| Multifamily loan programs are applicable for some loan types | Qualification requirements and loan-specific stipulations can be strict and may limit certain borrowers |
| Some financing options are suitable for first-time real estate investors | Financing costs can be expensive |
Where to Get Apartment Financing
If the preceding options sound applicable to your real estate investment needs and you’re wondering where you can get financing, consider the following:
- Government-backed loans: Loans that are backed by government programs can be found via a variety of partnering lenders. You can begin your search by visiting the Commercial Real Estate Finance Company of America’s website to start looking into your options.
- Balance sheet loans: Balance sheet loans are widely available and can be sourced from a bank nearest you or via an online lender.
- Short-term Apartment loans: Various lenders offer short-term loans. We recommend RCN Capital, as it offers financing options suitable for small businesses. You can apply online and receive funds typically within 10 days. Visit RCN Capital to learn more.
How to Choose an Apartment Loan Type
The loan types applicable to your business needs can vary based on how you plan to utilize your investment, your qualifications as a borrower, and the lender’s eligibility criteria. When choosing a loan type, there are some factors to keep in mind to ensure that you are making the most of your financing opportunity:
- Determine your investment financing needs: Whether you plan to acquire, construct, or renovate an apartment building, you should determine exactly how much financing you need, along with your budget and plans to repay the loan.
- Review your qualifications as a borrower: You may not qualify for certain loan types, so it’s important to review necessary qualifications and stipulations required of the loan type you seek. Criteria to consider include credit score, DSCR, collateral, and cash flow. The better your qualifications, the better your odds of approval.
- Compare rates and terms among lenders: Once you’ve evaluated all of your financing options, you should compare rates, terms, and costs among lenders to ensure you get the best deal for your investment needs.
Frequently Asked Questions (FAQs)
Yes. While it may be more difficult to obtain financing options, it is possible. Apartment financing can be utilized by anyone who may benefit from the structure of an apartment loan; whether it be for constructing a new complex, acquiring an investment property, or assisting existing owners whose buildings are in need of renovations or repairs.
It depends on the type of financing you use. For government-backed loans, a score of 650 is recommended. For bank balance sheet loans, we recommend a score of 680. Lastly, for short-term loans, a score above 600 is generally acceptable.
Yes. Depending on the terms of your loan and the facilitating lender, apartment complex loan funds can often be used to cover various renovation costs to improve the quality of a building.
It varies depending on the loan type, the lender, and your qualifications. Generally you can expect to make a downpayment ranging anywhere from 0% to 30% of the purchase price.
Bottom Line
When getting a small business loan for an apartment complex, there are a few options to consider. For borrowers who are pursuing investments in multi-family housing, there are various stipulations and qualifications required of each loan type. Loan funds can be used for construction and acquisition purposes for both new and seasoned real estate investors. They can also be used to refinance or renovate a property should a business have an existing portfolio.
Before moving forward, be sure to weigh all apartment financing options and choose one best suited for your business needs.
