Everything You Need to Know About Apartment Building Financing

Ever since the 2008 crash, Americans have been a little hesitant about investing, especially in the stock market.

When it comes to real estate investing, though, folks are a little more willing to take a chance. In fact, real estate is the number one long-term investment among adults in the U.S.

Whether you’re new to the real estate investment world or are a seasoned veteran, you might want to consider purchasing an apartment building or another multifamily home.

Not sure how you’re going to get apartment building financing? Read on for some tips to help you fund your next investment venture.

Why Invest in an Apartment Building?

If you’re interested in becoming a real estate guru, you might want to consider expanding your investments. There’s nothing wrong with investing in single-family homes, but there are also lots of perks to investing in larger properties like apartment buildings.

Here are some of the greatest benefits of apartment building investment:

  • Less risk since you don’t rely on just one family to make your monthly payments
  • Pay down debt faster when you receive payments from multiple tenants
  • Easier financing since lenders consider them to be less risky
  • Easier management since all your tenants are located in one place

When you purchase an apartment building, you also are eligible for more tax credits from things like apartment management fees, insurance, and advertising fees.

Apartment Building Financing Options

As you can see, there are lots of reasons to consider investing in an apartment building.

But, of course, you need to make sure you can pay for such an investment. Unless your dad can give you a small loan of a million dollars, chances are you’re going to need to take out a loan to purchase the building.

There are a few different types of loans you can apply for when you’re trying to purchase an apartment building, including the following:

Multifamily Conventional Mortgages

A conventional mortgage is offered by a traditional bank or credit union with terms of 15-30 years. This is an option if you’re looking to purchase a property made up of 2-4 units.

These are a good option for individuals who want a long-term loan and are purchasing a property that is already in good condition.

In order to get approved for a multifamily conventional mortgage loan, you’ll need to meet the following criteria:

  • A credit score of 680 or higher
  • Cash reserves for 6-12 months
  • A debt service coverage ratio (DSCR) of 1.25 or higher

If you meet these criteria and already have a relationship with a financial institution that offers multifamily loans, you shouldn’t have a problem getting approved for this loan.

Government-Backed Apartment Loans

If you’re interested in purchasing a property that is made up of five or more units, a government-backed apartment loan is a good option to consider.

This is a multifamily loan sponsored by Freddie Mac and Fannie Mae. Some of these loans are also sponsored by the Federal Housing Administration.

In order to qualify for government-backed loans, you’ll need to meet the following criteria:

  • A credit score of 650 or higher
  • A DSCR of 1.15-1.25 or higher
  • Occupancy of 85-95 percent
  • At least 9 months liquidity

This type of loan is a good option for you if you plan to live in one of the units in the building while renting out the others. They’re also ideal if you only have enough money for a small down payment.

Bank Balance Sheet Apartment Loans

A bank balance sheet apartment loan is originated by a traditional bank.

As the name suggests, this loan sits on the bank’s balance sheets. It is not backed by the federal government. The bank approved applications for these types of loans at their own discretion.

If you are or plan to be an “absentee owner,” a bank balance sheet apartment loan is a good option for you. This type of loan does not require you to live in the same community in which the apartment is located.

To qualify for this loan, you’ll need to meet these criteria:

  • A credit score of 640 or higher
  • A DSCR of 1.25 or higher
  • At least 90 percent occupancy
  • Three months or more of stable tenants

These types of loans are “recourse loans.” This means that, as a borrower, you are held personally liable for repaying the loan. It also means that it’s easier to qualify than when you’re applying for a government-backed loan.

Short-Term Apartment Loans

Short-term apartment loans are less common than other types of loans. This is because most investors treat apartments as long-term investments.

There are perks to this type of loan, though. For example, if you plan to renovate a building before you start renting out apartments in it, a short-term loan gives you the cash to do that. Then, you can refinance the loan after you’ve fixed it up.

Short-term loans are also an option if you plan to flip the building.

To qualify for a short-term loan, you’ll need to meet the following criteria:

  • A credit score of 550 or higher
  • A DSCR of 1.05 or higher
  • An interest reserve if you have a DSCR  below 1.05

You will also need to be able to prove to the lender that you have experience owning multifamily buildings or carrying out other types of building rehab projects.

Most lenders want to see that you’ve successfully carried out 2-3 other, similar projects before they’ll approve your loan application.

Need More Investment Advice?

There’s no reason to let a lack of funding stop you from diving into the real estate investment game. There are lots of different loans available to help you achieve your goals.

Now that you know more about apartment building financing, it’s time to go out and get the money you need to fund your next big investment project.

Are you interested in learning more about the exciting world of real estate investing? If so, be sure to check out the Finance section of our site today.

You’ll find all kinds of helpful investment articles here that will teach you everything you need to know about buying real estate.

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