Questions when looking for apartment building loans

Questions when looking for apartment loans.

  • How much money do I need to buy an apartment complex? With loans over $1 million you will generally need 20% down, plus closing costs.  An exception to this are HUD loans.  HUD Loans require as little as 15% to 17% cash down.
  • Are 30-year fixed rate loans available for Apartment Buildings? Yes, Fannie Mae has loan terms for 30-years.  HUD Loans offer fixed rates, fully amortizing loans going out to 35-years.  For new construction HUD loan terms include the construction period plus 40-years.  When considering a loan that allows the longest amortization you might want to investigate HUD loans.
  • Are nonrecourse loans available for apartment building loans? Yes, nonrecourse loans are available on loan amounts starting at $1 million.   Fannie Mae, Freddie Mac, HUD FHA loans, and CMBS (Commercial Mortgage Backed Securities) all offer nonrecourse loans.
  • How long does it take to close an apartment building loan? The closing process norm is 60-days from the date the loan is under formal application and the borrower has signed the formal engagement letter with the lender.  This formal engagement letter is sometimes referred to as a Term Sheet, or Application.  This 60-day estimate is the norm for Fannie Mae, Freddie Mac, CMBS, and portfolio lenders.  HUD loans require much longer time to close.  When going with a HUD loan we have lending partners that will fund and close the loan in about 60-days, you continue with the HUD loan closing and when the HUD loan funds you pay-off the short term bridge loan.  Using this approach to allows you to close the loan within the typical 60-days and still capture a 35-year low fixed rate with a HUD loan.
  • Do I have to have prior experience and ownership of apartments? Some lenders do require you to have four or more like properties under management or ownership.  Freddie Mac and Fannie Mae have specific requirements while HUD does not.  If you decide to finance with a HUD loan and do not have prior experience with HUD financing you might be asked to hire a third party management company to assist with managing the property for the first year or so.
  • Are their financial statement covenants? Yes, Fannie Mae and Freddie Mac both require the principals in aggregate to have liquidity post-closing of no less than the sum of 9-months principal and interest payments.  HUD loans do not have this requirement.
  • What is the minimum debt service coverage ratio required? For the most common loan products 1.25x is the minimum Debt Service Coverage Ratio (“DSCR”).  However, for HUD loans the DSCR ranges between 1.11x and 1.176x.  DSCR is the annual net cash flow available  divided by the annual principal and interest payments.
  • Which loan could provide the best net cash flow to me? Generally, HUD Loans offer some of the lowest interest rates, the longest amortization with the least amount of cash or equity in the property.  If you are looking for high leverage, fixing the interest rate for 35-years, nonrecourse, lowest debt service coverage ratio that would free up as much cash flow as possible you would want to consider financing with one of the HUD loans.

Have more questions not addressed above?  Please see our web site for more detailed information on some of the most common loan products for apartment financing (