How to Invest in an Apartment Building

Stephen A. Sobin

As a commercial mortgage broker with almost 35 years of lending experience, I am often approached by first time investors who are looking to buy an apartment building as an investment.  These new investors want to understand the steps involved in locating and purchasing their first building.  The following guide should be followed:

Check Your Credit – go online to one of the free credit reporting sites on the internet and run your credit report and credit scores.  Lenders expect to see borrowers with a good credit rating.  If any negative items appear on your credit, make every effort to clear up these items in advance.  If you have experienced past problems, be ready to explain these problems in a well written letter of explanation.

Locate an Experienced and Competent Real Estate Agent – make sure you find a real estate agent that specializes in apartment buildings.  Most agents that sell homes for a living have no experience selling apartment properties.  As a first timer, you need an agent that can help you through the details, as a commercial investment is much different than buying a home.  The agent should understand which neighborhoods are on the rise and which neighborhoods to avoid.

Get Full Disclosure – it is crucial that you obtain complete financial records on the property.  Do not rely on verbal statements.  You need to verify all income by looking at the leases and all expenses by looking at actual bills.  Most sellers overstate the income and understate the expenses.  Do your homework carefully.

Visit the Property – do not consider making an offer until you inspect the interior and exterior of the property carefully.  Is the property in good repair?  Is there any deferred maintenance?  Are the units actually occupied or is there apparent vacancy?  Is the neighborhood relatively safe and free of crime?  Are there other buildings in the nearby area that are in disrepair or suffering from high vacancy?

Make a Legitimate Offer – don’t be fooled by a high asking price.  Calculate the gross income and subtract expenses to come up with a net operating income.  The NOI needs to be adequate to cover a proposed mortgage, as well as, return a profit to the owner.  If the numbers don’t work, keep shopping.

Engage an Experienced Commercial Mortgage Broker – a commercial mortgage broker specializes in financing investment properties and will understand all of the nuances of a commercial mortgage loan.  It is crucial that you find a broker who is competent and experienced.  As a first-time buyer, the advice you receive will be invaluable.  A good broker will make sure you offer a fair price and do not overpay.  He will understand the market and negotiate the best terms available for your particular needs.

Be Prepared to Move On – many investment opportunities are not fairly priced.  Do not make the mistake of falling in love with a property.  This is an investment and you need to remember that the goal is to make a profit.  If the property does not make sense, move on and keep shopping.  Your commercial mortgage broker will assist you in this regard.

What to watch out for when considering a commercial property investment and what the “hot buttons” are for commercial mortgage lenders

I constantly receive phone calls and emails from borrowers who ask me what to watch out for when considering a commercial property investment and what the “hot buttons” are for commercial mortgage lenders.  Here are some thoughts:

Borrower

These days, lenders look very closely at the borrower’s qualifications before extending credit.  The borrower should have good credit, with FICO scores of 680 and higher.  Lower credit scores may be acceptable with solid, written explanations.  If your credit contains any foreclosures, bankruptcies, judgements or short sales, be prepared to offer full disclosure upfront and have proof that everything has been settled.  Next, lenders will look at the borrower’s total net worth and liquidity.  They will expect to see a financial statement with net worth equal to the loan amount and at least six months of cash reserves to cover debt service.  If a borrower expects a commercial mortgage loan of $1,000,000 or more, they have to show the lender that they have the financial statement to back up the loan.  Equally important to the lender is experience.  Do you have experience owning and/or managing similar properties?  If not, are you willing to hire a professional management company to manage the property for you?  Lenders need to secure their investment and will not lend to a borrower that does not have a proven track record.  Last, a lender will look at the size of your down payment.  Gone are the days when banks and other lenders will offer 100% financing or other very low down payment loans.  Lenders will expect to see a owner that is vested in the project.

Property

Next, a lender will look at the property.  They will expect to see a well run property in good condition.  They will look at the demographics of the neighborhood and local crime statistics.  Properties that are run down, poorly managed, or in very rural areas will be highly scrutinized.  These properties might require a short term bridge loan or private money loan until they will qualify for regular bank financing.  Another very important factor to consider is the past and current use of the property.  Properties that are, or could be, environmentally hazardous will require extensive environmental testing.  Properties like gas stations, dry cleaners, and industrial properties with onsite chemicals will be very hard to finance.  These days, retail properties with marijuana based tenants will almost certainly cause problems for a lender.  It is very important for a lender to review the tenant base and the types of businesses located at the property upfront.

Financial Numbers

After a lender is comfortable with the borrower and the property type, they will then delve into the numbers.  First, they will look at the rent roll to make sure that the vacancy and rental rates are acceptable.  They will look at how long the tenants have been in occupancy and how long the leases are.  Properties with constant turnover and poor leases will cause problems for a lender.  Next, a lender will look at 2-3 years of operating statements and look at the income, expenses, and net cash flow.  They will expect to see properties that have a proven ability to generate rental income, reasonable expense ratios, and net income that is sufficient to cover the mortgage payments.  They will calculate loan-to-value ratios, debt service coverage ratios, and debt yields.  Lenders have internal guidelines for all of these calculations that must be met.

Banks and other lenders got into lots of trouble during the last recession by making credit decisions too freely and without proper oversight.  Lenders today are required to be more careful so as to avoid the problems they encountered in the past.  At Select Commercial, we are well versed in preparing loan packages that make sense and address lenders’ concerns.  Let us know if we can help you!

How to Qualify for the Best Commercial Mortgage Rate

I think it’s safe to say that anyone interested in securing a commercial mortgage loan wants to get the best commercial mortgage rate possible. However, you may be surprised to learn all the different factors that determine what rate you will receive on your commercial mortgage request. For many consumer loans, a lender will mainly look at your credit score. For example: if you’re buying a new car, the dealership will pull your credit and if your credit is excellent, you will most likely receive their lowest rate. When it comes to getting the lowest commercial mortgage rate available, there are many things considered.  Of course, the credit score of the borrower is also considered in securing a commercial mortgage loan and is very important. However, there are many other factors lenders consider, including:

  • Property location – Properties in large metropolitan areas are considered lower risk
  • Good quality tenants – A Domino’s Pizza tenant is considered better than a generic pizzeria
  • Do the majority of tenants have long term leases?
  • Is there a good history of stabilized occupancy?
  • Has lease turnover been kept to a minimum?
  • Is the property in good condition?
  • Lower leverage is better – Is your loan to value 80% or 50%?
  • How is borrower’s credit rating?
  • What is the borrower’s net worth?
  • What is the borrower’s cash liquidity?
  • Does the borrower have experience managing property?

As you can see from this list, there are many factors to be considered when it comes to determining what commercial mortgage rate is given.

Contacting a good commercial mortgage broker who deals with many different lenders can also help you get a good rate. A good commercial mortgage broker will deal with many active lenders, and will have many lenders to choose from, increasing the chances that they will have a lender that specializes in the type of loan that you need.  Selectcommercial.com has a large portfolio of lenders who specialize in the following types of loans:

  • Apartment Building Loans (up to 80%)
  • SBA Mortgage Loans (up to 90%)
  • Owner occupied business real estate loans (up to 90%)
  • Medical practice acquisition loans (up to 100%)
  • Commercial mortgage loans

 

Investing in Commercial Real Estate

Are you thinking of investing in commercial real estate? Are you looking for a solid return on your investment? If you answered yes to these questions, you may want to speak to a commercial mortgage broker. Why should you deal with a commercial mortgage broker?  With today’s market conditions, the loan approval process is getting tougher and tougher. Banks and other lenders are very selective in determining what types of investment properties they are willing to finance. By paying attention to which types of properties lenders are willing to finance and which they aren’t, you may be able to make better investment decisions.  Commercial mortgage lenders are constantly evaluating which types of properties to finance.  This valuable data may help you determine which type of investment property to consider.

Which types of loans are banks and other lenders are currently considering?  Apartment building loans are very popular right now. Due to the turmoil in the housing and employment markets, many people are choosing renting over buying. This is creating demand in the rental sector. Other favorable property types include:  anchored retail centers, medical office buildings, and other general purpose multi-tenanted properties.  In addition, lenders like business mortgage loans where the owner will occupy the property and use the property to operate his/her own business.

You may want to think twice before investing in any of these properties, as they are tough to finance:  vacant property, raw land, construction projects, or retail space without anchor tenants.  In addition, lenders do not want to finance projects with insufficient down payments.  Seller financing and no-down payment deals will not be considered in today’s market.  Lenders expect to see the borrower invest a significant amount of money before risking their investment capital.

To learn more about what commercial underwriters consider when evaluating a commercial loan request, please see What Do Commercial Mortgage Underwriters Look for?

What Do Commercial Mortgage Underwriters Look for?

What do commercial mortgage underwriters look for? The lending industry as a whole has changed quite a bit over the last five years. Commercial lending hasn’t been immune to the many changes affecting the industry. Below is a summary of what commercial lenders look for when deciding on approving a commercial mortgage loan or not.

The first thing a commercial lender will look at is the borrower. The borrower must have a good credit rating. A minimum FICO credit score of 680 is typically required. Lower scores may be acceptable on a case-by-case basis and with compensating factors. They must also have good liquidity and net worth. Minimum net worth should equal the loan amount. Minimum liquidity should equal six months worth of principal, interest, taxes and insurance. Situations where an owner is looking to pull cash out after a short period of ownership are highly scrutinized. A borrower must have vested equity in the project. 100% financing, and the like, are no longer available. Lastly, a borrower should have experience owning and managing properties similar to the property being mortgaged.

The lender will also look at the neighborhood of the property. The property should be located in an established or emerging market with a minimum population of 50,000. The area should not be undergoing any significant declines in population. Excessively rural areas will be highly scrutinized. Also the area should exhibit diverse employment and/or economic base. Finally, the property must be located near, and easily accessible to, major highways/freeways, employment sources and other demand generators.

What is the condition of the property? Lenders prefer newer construction. Older properties in good repair, or those that have undergone recent renovations, are acceptable. Commercial lenders are looking for the remaining useful life of the property to exceed the length of the amortization period. Also, the property should not require major repairs or suffer from deferred maintenance, unless satisfactory reserves are established. Of course the property should be free of any environmental hazards or risks.

A commercial lender will want to know the operating history of the property. The property should show strong operating performance with no material declines in revenue or net operating income over the past two years. The property’s occupancy should be at or above the local market’s average occupancy with no material declines over the past two years. Also, the tenant base should be diverse and creditworthy. Lastly, the property should not exhibit high vacancy rates or be subject to excessive tenant rollover in the short term.

Lenders will want to know if the property is in legal compliance. The property must conform to applicable zoning. Certificates of Occupancy must be obtained. The borrower must have all applicable licenses and permits for the intended use of the property.

While the guidelines for a commercial mortgage are stricter, there are lenders with money to lend. If you would like a quick no cost, no obligation quote, please visit SelectCommercial.com or call Stephen Sobin at 877-548-9454.

Who Are The Commercial Mortgage Lenders?

Commercial mortgage lenders have many sources of capital to choose from when placing a commercial mortgage request with a lender. Who are these lenders, and which is best for your particular needs?

Commercial Banks – Although commercial banks are still major commercial real estate lenders, the recent economic and market conditions have caused commercial banks to be much more conservative in their guidelines. Commercial banks have severely limited their geographic lending areas, cut back on loan to value ratios, and toughened up their credit criteria. In addition, commercial banks have cut back on their loan terms, preferring to keep their loan terms short – usually three to five years.

Local and Community Banks – Many local and community banks have stopped lending altogether due to the economic downturn. Those that are still lending are looking for “relationships” with their borrowers. They want to see deposits and other banking activity moved to their banks. Most do not want one-time transactions or one-time loans.

Agency Lenders – Fannie Mae and Freddie Mac are actively engaged in apartment building and multi-family lending for qualifying properties and strong borrowers. Borrowers seeking agency loans should have excellent credit, personal net worth, liquidity, and experience. The property should be in good condition with a solid rental history. Properties with high turnover, vacancy or deferred maintenance will not qualify.

Conduit Lenders – Wall Street lenders have traditionally been active with Commercial Mortgage Backed Securities (CMBS) loans. These loans, usually $3,000,000 and more, are more difficult to obtain in today’s market due to the volatility in the credit markets. Rates and underwriting requirements have been swinging wildly in this sector of the market.

Insurance Companies – Insurance companies have always provided low rate and long term loans on commercial real estate. These loans are underwritten conservatively (low loan to value ratios) and are offered on strong properties and to strong borrowers. Insurance company rates do not fluctuate with each and every move in the market as these loans are tied to the company’s internal cost of funds.

Credit Unions – Many credit unions are beginning to aggressively lend on commercial real estate. These lenders typically like deals close to home and like to establish relationships (they like deposits). They most often compete with the local and community banks in the area. These lenders weren’t very active in the past and don’t usually have any bad loans on their books at this time.

Private Lenders – Due to the uncertainties in the market, private lenders have stepped in to create access to capital for those borrowers unable to obtain conventional financing. These loans are usually short term and at rates considerably higher than conventional rates. These loans require less underwriting time and usually close within 30 days. Private lenders are more concerned with property value and potential cash flow than with borrower credit issues.

There is a lot of uncertainty and volatility in today’s lending market. The days of walking into your local bank and obtaining the loan you need (and that is best for you) are long gone. A good commercial mortgage broker who understands your needs and has access to all of the lenders described above is a necessity to get the best commercial mortgage rates and terms. He will be able to guide you through this process and help you obtain a commercial mortgage that meets your needs.

If we can help you, please visit www.selectcommercial.com or call Stephen Sobin at 516-596-8537.