Apartment Loans

IN THIS GUIDE

What are Apartment Loans?

Apartment loans are a type of multifamily loan created for the purpose of financing apartment buildings. They’re taken out by individual real estate investors and institutional real estate investors (REIT’s). 

Apartment loans between $1-$7M are considered “small” loans. Institutional investors typically take out apartment loans ranging between $10-$30M. Fannie Mae and Freddie Mac aren’t your only options for small apartment loans, but they’re often the best choice. 

In this article, we’ll break down the pros and cons of investing in apartments, where you should go for a loan, and the best options to finance your loan.

Let’s dive in. 

Should you invest in Apartments?

Investing in an apartment is a big decision. That’s because purchasing an apartment complex is more complex than purchasing a single family residential property (SFR). 

 

Investing in an apartment complex increases your risk exposure; however, if you manage your property well, apartments can provide an excellent return on investment. Here are some of the main pros and cons of investing in apartment complexes:

Pros

  • Diversified rental income from different tenants
  • Vacancy depends on a single unit
  • Greater net operating income and rate of appreciation
  • Higher return on investment

Cons

  • Apartment complexes aren’t easily liquified
  • Riskier loans
  • Difficult and competitive to qualify for loans

I want to take out an apartment loan—who should I go to?

You can take out a loan for an apartment complex either through a private money lender or a bank.

 

  • Private Money Lenders

Private money lenders are flexible. Also known as hard-money lenders or bridge lenders, they can offer greater flexibility in regard to their loan terms. 

 

  • Banks

Publicly traded banks (think: Chase or JP Morgan) can offer cheaper, more competitive interest rates than private money lenders. However, banks offer less flexible guidelines and loan terms.

Fannie Mae Apartment Loans

How can I finance an apartment loan?

There are three main financing options for apartment loans: 

 

  1. Freddie Mac Apartment Loans
  2. Fannie Mae Apartment Loans
  3. FHA Apartment Loans. 

 

Freddie Mac Small Balance Loans

Many borrowers use Freddie Mac’s Small Balance loans (SBL Program) to finance their apartments. SBL loans range in size from $1-7.5M, so they fit perfectly into the small borrower market. Additionally, SBL loans offer great flexibility for borrowers: fixed-rate, floating-rate, and interest-only loan options, all with various term lengths. Keep in mind that SBL program rates are lower if you’re borrowing in a “Top Market” like Los Angeles or New York. 

Typical terms for Freddie Mac SBL Loans:

  • Size: $1-$7M

 

  • Uses: To purchase or refinance an apartment, or multifamily property

 

  • Amortization: Up to 30 years

 

  • Maximum LTV:
    – Top Markets – 80%
    – Small/Very Small Markets – 70% for refinances

 

  • Minimum DSCR:
    – Top Markets – 1.2x
    – Standard Markets – 1.25x
    – Small Markets – 1.3x
    – Very Small Markets – 1.4x

 

  • Recourse: Non-recourse with standard carveouts

 

  • Terms:
    – 20-year hybrid adjustable-rate loan, 5/7/10 year initial fixed-rate period
    – 5/7/10 year fixed rate loan

 

  • Borrower Requirements: Net worth of at least 100% of the loan amount with liquidity of at least 10% of the loan amount

 

  • Timing: 45-60 days

Fannie Mae

Fannie Mae’s most popular option for apartment loans is the Small Loan. Although the Fannie Mae Small Loan package contains many similarities to Freddie Mac’s SBL program, there are a few notable differences between the two.

Typical terms for Fannie Mae Small Loans:

  • Size: $750,000-$6M

 

  • Uses: Conventional apartment properties, affordable properties and manufactured housing communities (MHCs) with 50+ pad sites 

 

  • Amortization: Up to 30 years

 

  • Maximum LTV: 80%, 75% for refinances 

 

  • Minimum DSCR: 1.25x 

 

  • Recourse: Generally non-recourse loans with standard carve-outs

 

  • Terms: 5-30 year fixed-rate terms. Floating-rate, partial and full-term interest-only, and hybrid ARM options are available

 

  • Borrower Requirements: Borrowers usually need a net worth of at least 100% of the loan amount and liquidity equal to 6 months of mortgage payments (principal and interest)

 

  • Timing: Closing generally occurs 45-60 days post-application

 

  • Commercial Limits: Commercial space is limited 35% of the project’s rentable area and must not contribute more than 20% of the property’s effective gross income

 

  • Prepayment Options: Graduated step-downs or yield maintenance 

FHA Multifamily Loans

FHA Apartment Loans are loans insured by the Housing and Urban Development Department (HUD). These types of loans can be a great option for financing your apartment; however, they can be difficult to obtain, especially for smaller borrowers. 

 

HUD generally preferences borrowers with years of multifamily apartment experience and strong financials. Additionally, it takes up to 6-10 months to close a HUD loan. Although HUD loans technically start at around 1-2M, they generally don’t work well for borrowers looking for less than $4-5M in capital. 

Key Takeaways

Investing in an apartment complex isn’t a small financial decision. However, if you manage your property well, apartment complexes can provide a huge return on investment. Always remember to explore the pros and cons of all your options for loans and financing.

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