Updated: Jan 9
You’ve made the decision to purchase an apartment building. You’ve done your research, properly vetted the numbers and came up with a potentially excellent investment. The price is right, and you have investors lined up to help with the purchase. Now the only thing left is arranging financing.
But that might not be as easy as it sounds. Actually, the key to financing an apartment building is finding the right lender. Even though multifamily properties are basically residential, properties with 5 units and above are considered commercial properties to lenders. The reason is obvious: you plan to generate income instead of using it as your residence. And finding the right lender is important not only because commercial loan rates vary from one lender to another, but also because a good lender will work with you in case things go south, while others will rush to take control in case you can’t handle the loan payments.
There aren’t any set rates like with most home mortgages; each lender looks at the strength of the individual deal, the sponsor and the market and evaluates them a bit differently. In order to get the lowest rate, you’ll need a strong net worth and liquidity, solid and proven track record in managing multifamily properties, and have a solid cash flow in a strong market. There are different types of lenders to choose from, so let’s look at what is best for your purchase.
These are the loans that are offered by government agencies - including Fannie Mae and Freddie Mac. The biggest difference between an agency loan and a traditional bank loan is that agency loans are non-recourse loans, meaning that the collateral secures the loan debt, which is the apartment building. This helps to protect your personal liability, since the agencies can’t go after any of your personal assets - even if they weren’t put up as collateral. Bank loans, on the other hand, are usually recourse loans, making you personally liable for the full amount of the loan if you default.
Fannie Mae has a variety of loan programs for purchasing or refinancing different multifamily properties. They include 5+ unit apartments and condos, senior housing, student housing, affordable housing and others. Their biggest program is the DUS (Delegated Underwriting and Servicing program). It partners with private lenders in order to provide competitive rates and faster execution.
The DUS program offers loans from $3 million, with up to 80% LTV (Loan to Value). The LTV is calculated by dividing the amount of money borrowed by the appraised value of the property. Generally, the higher the LTV, the greater risk to the lender, so interest rates will usually be higher.
Freddie Mac non-recourse loans are available for $1,000,000 and up, with 80% LTV and both floating and fixed-rate options up 10+ years and a 30-year amortization. As with Freddie Mae, borrowers must have a minimum net worth equal to the size of the loan. In addition, borrowers must have enough liquidity for 9 -12 months of mortgage payments. Another factor is experience. For agency loans, borrowers must demonstrate extensive prior experience in successfully managing multifamily properties.
CMBS stands for “commercial mortgage backed security,” as these loans are pooled into securities and then sold to investors on the secondary market. For buildings that are not appropriate for agency loans, CMBS financing is often an excellent alternative.
This is particularly true if borrowers are faced with credit or legal problem