Financing an apartment building can be done in several ways. Apartment loans are a type of multifamily 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
- Apartment loans are offered by numerous providers that can help borrowers with the purchase of an apartment building, whether they be first-time owners or seasoned real estate investors.
- Each loan offers differing rates and terms and has varying requirements as to qualifying, such as location and owner occupancy conditions.
- Existing apartments in need of repairs or renovations can also benefit from funds sourced by an apartment loan.
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:
- Federal National Mortgage Association (Fannie Mae): Fannie Mae offers programs that support loans of up to $6 million, maximum LTV of 80%, and up to a 30-year amortization period. 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.
- Federal Home Loan Mortgage Company (Freddie Mac): Programs offered by Freddie Mac are popular for their low rates and flexible term options, with amortization of up to 30 years. Usually offered for loans up to $7.5 million, these also require certain net worth standards to be considered eligible.
- FHA: 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 upward of a few million dollars. These loans also take longer to close, usually within 6 months to a year, and have an amortization period of up to 35 years.
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, and 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 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 lenders. 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 or refinance 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 financing 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%. Loan funds are disbursed swiftly, usually within seven to 30 days. Check our roundups of the best hard money lenders and best commercial bridge loans for some options.
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 a variety of opportunities and investments to help your business grow. Apartment loans may be especially useful to small businesses who are:
- Looking to make a real estate investment: Apartment financing can help facilitate the purchase of multifamily housing for first-time owners. Check out the types of multifamily 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 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 (CRE) 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.
Do you want to get a loan but don’t know how to? Read our guide on how to get a small business loan for a step-by-step breakdown.
Where To Get Apartment Financing
- Government-backed loans: Loans that are backed by government programs can be found via a variety of partnering lenders. You can begin your search with the Commercial Real Estate Finance Company of America, which can connect you with an apartment lending platform. Visit 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. If you need a resource, check out Kiavi, as it offers competitive rates and quick disbursements. Visit its website and fill out a free application to find out if you qualify.
- Short-term apartment loans: There are a variety of lenders who provide 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.
Frequently Asked Questions (FAQs)
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.
Yes. Depending on the loan type, most loan programs allow for other multifamily housing pursuits, such as affordable housing or community housing.
Depending on the loan type chosen, repayment periods vary and can range anywhere from a few months for short-term loans, or up to 35 years for some government-backed loans.
Bottom Line
There are various small business loans for apartment complexes available, for a wide variety of borrowers pursuing investments in multifamily housing. Each loan type has stipulations and qualifying requirements pertaining to the intent of the loan. 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.
