Large Multi-Family Financing
I've found a $1.8M, 40-unit apartment complex that seems to be a going concern. I would like to own and operate it as a family business. Financing for bigger places seems to be totally different than, say, a 2-plex or 4-plex, so I have some dumb questions.
80% LTV is the typical max. Is 90% LTV unrealistic or overly expensive?
Is the value always the lower of purchase price and appraisal?
I know my creditworthy matters (FICO in mid-700's) but does employment enter into the equation? I estimate an NOI of $150K / yr (GSI=45+K) and definitely don't plan on feeding the business cash. I would be leaving the software industry and making property management my new field.
Thanks for any other thoughts too,
-- Tim
There are loans to do whatever you want, but the payments are what you need to worry about. If your credit is in the 700's then you can get the 90% easily.
Your employment should only be a factor for stability, not necessarily the income, if you have proven financials from the complex. If there isnt income showing from the complex, then they want your income to be able to make the loan. I wouldnt quit the day job just yet, at least until the loan is gotten. The more income being generated the better your chances to get the loan.
The value depends on the loan type. There are some that take the lower of the two. Most will want to see a set percentage of monies coming from you. The reason for that is the higher percentage that a borrower puts down the less likely it will go into foreclosure. You can do 100% of the loan through secondary loans etc, but you need to ask yourself if you can make the payments.
Also dont forget that the best case scenario for becoming a business owner rather than an employee, is that you have 2 years of income set aside in the bank should anything go wrong. The flipside would be worst case scenario of 6 months income set aside.
Personally, for me, I found it was more expensive for me to do the work, rather than someone else doing the job. The main reason being, that I was too busy unclogging toilets to look for other ways to generate more income. Since you are in a specialized field rather than an unskilled worker, you may want to look at the cost to the business of you doing the work, rather than a minimum wage worker or management company.
good luck,
Kyle
Quote: If your credit is in the 700's then you can get the 90% easily.
I do not believe that 90% on a 40 unit property will be possible regardless of your credit score unless 10% comes from a second source.
Brenda
I must agree with Brenda on this one! I believe that commercial loans like this one you will need at least 20% down and you can get the 80% financing pretty easily.
Suggestion: See if you can get the current owner of the apartment building to take back a second for the 20% down payment. This way you have out of pocket costs only equaling the closing costs - which I can imagine are going to be hefty in and of themsleves!
Good Luck!
Matt
Your right....financing is completly different once you get into 5+ units. It's now called commercial financing rather than residential financing.
In residential financing they preapprove YOU for financing, and then look at what you want to buy.
In Commercial they preapprove a project for financing, and look at you as an afterthought.
Most lenders are going to want to stay between 70-80% LTV. Many will also want to do 20-25 year Ammoratizations. There are exceptions. Talk to GOOD commercial mortgage brokers. Keep in mind that just about every mortgage broker out there will claim that they do commercial. When you start talking to them, don't tell them what it is you need to get financed and ask them specific questions (how many deals did you do last year, biggest deal, smallest deal, number of commercial deals, etc).
I'd be leery of companies that want you to put up earnest money up front. If they drop the ball, they've still got some of your money, and it can be tough to get back.
Again, most lenders go off the lower of the appraisal or the purchase price. Many care about what the max CLTV is and have a cap of 90%.
You can get around some of these things by setting up a higher purchase price and having the seller carry a portion and give you concessions. You'll have to stay at or below an appraisal, otherwise it won't fly.
Thanks for all the replies.
What should I normally expect (or reasonably ask) the seller to cover in such a deal?
What additional concessions could make up 10% more? Does it matter what they are labeled as?
Thanks again,
-- Tim
Most lenders will also want to know your management experience and what kind of cash reserves you have. I don't know of any lenders that would do the deal that little of equity put in it. Good luck.
Ron
That 40 unit complex wo9uld do great as 5 fourplexes!!! If I were you I would offer the seller 100% of the asking price, plus another 10%. Have the seller in exchange for the 10% put your name on title as Jr. partner. Now, as a Jr. partner you can get all the surveys, paperwork and zoning work done and turn those 40 apts. into 5 fourplexes!!!
These will have an increased value and now you can go to a non-commercial
(because as fourplexes, it's not a commercial property) lender and do a refi to essentially buy out your partner.
You now have the property with increased rents and value, not to mention the tax-free money form refi!!! :-o
just an idea. ask seller to carry 20% or 25% for a couple of years at say 7% with a baloon at the end with no payments. i'm working a deal right now and that is what the seller offered me.