How to buy and finance apartment buildings

Author : 6 Clicks | Published On : 25 Nov 2021

Apartment construction loans are similar to other types of residential real estate financing. It all begins with a property, a borrower, and a lender and finishes with a secured loan and a newly purchased or refinanced property if all goes well.

Here's what borrowers should know about buying and financing apartment buildings:

What constitutes an apartment building?

One-to-four-unit properties, or one-to-fours, include detached homes, condominiums, duplexes, triplexes, and fourplexes. apartment building financing or multifamily housing are defined as structures with five or more dwellings.

A loan for a duplex, triplex, or fourplex differs little (if at all) from a loan for a single-family home. Still, loans for more significant properties require "a little different underwriting, a little higher qualification," according to Dan Borland, commercial real estate office manager at Wells Fargo in Orange County, California.

How to qualify

One distinction is that, before approving an apartment loan, the lender may look at more qualitative data to learn more about the borrower's expertise as a rental property owner or manager.


"We'll look at the candidate and ask, 'What have they owned, and what is their management experience collecting rent, managing properties, and managing a project of that magnitude?" According to Borland.

The borrower's credit score, income, and personal and business tax filings, as well as two years' worth of operational records and a current rent roll for the property, will all be taken into account.


The following are the most crucial property metrics:

Net operating income (NOI) is the annual income-less expenses generated by a property's activities.

Debt service coverage is a metric that compares cash flow to debt payment commitments.

The loan-to-value (LTV) ratio measures the loan amount about the property's worth.

"The property's debt must be serviced at a reasonable margin," adds Borland.

According to Blake Kreutz, the commercial loan officer at County Commerce Bank in Ventura, California, borrowers who require more flexibility may consider a small bank.

"We normally require a 30% down payment, and while credit score is crucial, it is not a deal-breaker," adds Kreutz. "We can work around someone stronger in one area but weaker in another."

Mixed-use and partially-occupied properties

Depending on the proportions of each use, mixed-use properties might be classed as commercial or residential. An apartment loan is a typical structure of multiple units spread across a few storefronts.

"If it's 50-50 or there's a lot more commercial," Borland adds, "the underwriting changes and the structure becomes a little more cautious."

Apartment complexes that are vacant or only partially occupied can be financed; however, the loan may be short-term and variable-rate to replace it with long-term financing after the property has stabilized.

If the rentals aren't enough to cover the loan, the borrower's cash flow may be able to help; but, "it would take a fairly strong borrower to maintain an entire building with a mortgage on it," Kreutz adds.