Apartment Building Loan – How to Finance a Building With More Than Five Apartments

후순위아파트담보대출 Finding the right apartment building loan can save you money on interest rates and make your investment more profitable. But how do you know which one to choose?


The main types of multifamily financing follow guidelines set by Fannie Mae, Freddie Mac or the FHA. They’re usually offered by regional banks.

Types of Apartment Building Loans

If you’re looking to finance a multifamily property with more than five units, your financing options are a little different from the one-to-four home loans available for detached homes and condos. Buildings with more than five apartments are categorized as commercial real estate, and thus require a specialized loan program.

Apartment loans come in standardized types that lenders can sell to Fannie Mae or Freddie Mac and customized types, known as portfolio loans, that lenders keep on their own books. The latter offer higher maximum debt to income, loan to value and loan size ratios than standardized apartment loans.

Like other commercial real estate loans, an agency apartment loan is based on the property’s net operating income (NOI). This number is calculated by subtracting all expenses from gross rents and then multiplying that amount by a factor determined by the lender. The NOI will also include a percentage of interest expense and property insurance.

Typically후순위아파트담보대출 , short-term apartment building loans have terms of three years or less, at which point they must be either refinanced into permanent financing or sold for profit. One good source for such short-term multifamily financing is RCN Capital, which offers multifamily loan amounts of up to $10 million. Check out their website to learn more about the firm’s offerings. The firm also offers a variety of longer-term apartment financing options.

1. Bank Balance Sheet Loans

Apartment buildings with five or more units fall into the commercial category for mortgage financing. They differ slightly from loans for single-family homes, duplexes, triplexes and fourplexes because they are financed as business investments — meaning the property is owned by a company such as 123 Main Street LLC rather than John Smith. This is important from a liability standpoint, since lawsuits can only target the company assets and not those of the individual owners.

Because of the added risk to the lender, loan standards for an apartment building are generally more stringent. Lenders will look for a sizeable down payment, large reserves and a high debt coverage ratio (DCR) of at least 1.2. They may also consider the borrower’s experience owning and managing rental properties, including their past success collecting rents and addressing problems.

Like other residential real estate loans, apartment loans are available as standardized types that lenders can sell to Fannie Mae and Freddie Mac or customized types known as portfolio loans that the lender keeps on its own books. Some are long term, others short term – with or without prepayment penalties.

Some apartment building loans are assumable, which means that if the owner sells the property, they can take over the loan without paying a penalty. However, not all loans are assumable and, even if they are, some might be subject to “full recourse,” meaning the lender can seize the borrower’s personal assets in the event of a default.

2. Fannie Mae Multifamily Loans

Fannie Mae multifamily loans are incredibly popular with commercial real estate investors because of their competitive rates and predictable underwriting process. They’re also non-recourse, unlike many bank and credit union loan types that require personal recourse provisions from the guarantor. This flexibility makes Fannie Mae multifamily loans a great option for both small and large-scale investment properties.

The standard Fannie Mae multifamily loan is available for the purchase and refinance of conventional apartment buildings with at least five units. It offers flexible loan terms with a range of amortization options up to 30 years and allows for maximum leverage at 80% LTV.

These loans can be used for conventional multifamily housing, student and military housing, senior housing, manufactured housing communities and even affordable housing rehabilitation, but they must meet strict criteria and qualify for the Rental Assistance Demonstration program (RAD). Freddie Mac’s Optigo small balance multifamily loan is another option.

In order to obtain a Fannie Mae multifamily loan, borrowers must have sufficient experience and strong financials to be considered a reliable multifamily investor. They must submit detailed financial statements, a trailing 12-month operating statement and property condition assessments. In addition, they’re required to maintain replacement reserves and insurance escrows. Some lenders may waive these requirements for lower leverage deals, but they’re almost always required for higher leverage transactions.

3. Government Backed Apartment Loans

There are many government-backed apartment financing options available for investors. These include FHA-insured multifamily loans, HUD 223(f) mortgages and local government rehab loan programs. These loans tend to be a bit more flexible than traditional apartment building financing. They typically require lower minimum credit scores and debt-to-income limits than conventional financing.

Additionally, HUD-backed multifamily loans are fully assumable. This can be a huge benefit for investors competing with all-cash offers on an apartment complex because it gives them a viable exit strategy. HUD-backed multifamily loans can also be a great option for fix-and-flip investors who want to get into a new project and need to season the property before refinancing.

Fannie Mae and Freddie Mac, the government-sponsored multifamily housing finance agencies, have been expanding their involvement in rental mortgages. Their goal is to help promote affordable housing and gentrification in cities and rural areas. However, critics say their cheap loans can lead to higher rents and further displace low-income tenants.

Life insurance companies are another source of multifamily financing. They often provide competitive rates but have a more stringent qualification process than other loan types. They are also a good choice for borrowers who need to replace existing financing that is due to prepayment penalties. Additionally, life companies offer construction mezzanine debt that provides additional leverage and is junior to the primary debt.