May 22, 2014
At Apartment Loan Store, we are often asked by our clients about apartment loan qualifications. Keep in mind that owning an apartment building is like owning a business. There are seven apartment loan qualifications that an investor seeking a loan needs to meet today.
Apartment Loan Qualifications:
- Net Operating Income – Does the apartment complex have positive net operating cash flow to support the loan payments on your desired loan? Preferably at a 1.25 debt service coverage ratio (DCR)? Start by looking at the last full year profit and loss statement of the subject property. Take the gross annual rental income and subtract all annual expenses to calculate the net operating income (NOI). Then figure out what your annual loan payments will be at today’s rates. Take the annual NOI and divide it by annual loan payments. This will give you the Debt Service Coverage Ratio. Most apartment loans require that you have a minimum of 12 months of stability of DCR at a 1.25. Some lenders want as much as 24 months stability. Like any business loan, the longer the apartment building is running profitably at a certain net income, the lower the risk to the lender.
- Occupancy – Does the subject property have an occupancy of 90% or more? This is usually a minimum. Some apartment loans require only 85% occupancy in locations where market occupancy is lower. Most apartment loans require occupancy to be at 90% for a minimum of 90 days. Some for six months or longer. Most lenders will also check economic occupancy to make sure that collections are good. In other words, are most of the tenants on the rent roll paying their rent?
- Location – Is the subject property in a desirable location? Most apartment loans require that the property be in a good neighborhood where quality tenants want to live. If this is a lower-class neighborhood in a higher-crime rate area, this could be a problem for your apartment loan. Do the tenants have a lot of junk piled outside their doors?
- Appraised Value – Is the property going to appraise at a high enough value to qualify the loan amount that you desire? Most apartment loans go up to 75% loan to value. Some up to 80%. You and your apartment lender should do some market research on the most recent sales comparables to estimate the value. You can contact a commercial real estate agent for help on this.
- Physical Condition of the Property – Is the subject property in need of a lot of repairs? Is the landscaping looking good? Is the paint peeling? Does the parking lot have cracks and pot holes? Quality low-rate apartment loans require that the property be in good condition. If it is not, you might need a more expensive bridge loan which will allow you to rehab the property.
- Experience of the Borrower – Because this is a business, most apartment loans require that the key principals (key borrowers applying for the loan) have experience owning a commercial apartment building of five units or more. It is best if you currently own an apartment complex. Unfortunately, if you own many residential rental buildings of 1 to 4 units, this often does not qualify you for an apartment loan.
- Financial Quality of the Borrower – Do you have a credit score of 680 or higher with few mortgage lates and zero foreclosures or bankruptcies in the past 10 years? Do you have a net worth equal to the size of the loan you are applying for? Do you have the down payment plus closing costs in savings? Do you have post-closing liquidity equal to 12 months mortgage payments? Many apartment loans require you to have a minimum of 10% of the loan in post-closing liquidity.
Call one of our friendly loan specialists at Apartment Loan Store at 866-811-9515 to get prequalified for your apartment loan.
By Terry Painter, President
Apartment Loan Store and Business Loan Store