When it comes to refinancing your Apartment Building the first thing you’ll want to know is how to qualify for the best rate. There may be things that have happened since you financed the building that could negatively affect your ability to refinance. Some of the factors that will be underwritten include: property value, loan-to-value ratio, debt-service-coverage ratio, borrower’s net worth, liquidity, and credit rating. If you are a good candidate for refinancing, your main goal will be to get the lowest rate and best terms possible.
While getting the best rate is very important there are other loan terms that need to be considered. For example: Is the rate fixed or adjustable? Your investment time horizon will help you answer that question. Are you considering selling the property? If so, the prepayment penalty will be important. Are you looking for a recourse loan or a loan without a personal guarantee? If there are multiple investors involved, it might be best to try to secure a non-recourse loan. What are the fees and closing costs involved in closing? A lower rate might look attractive until you factor in the costs involved. Is your lender capable of closing your loan on the terms promised? Some apartment mortgage lenders do not deliver on their promises and change terms during the underwriting of your loan. Is your lender experienced with apartment lending in your area? You should choose a lender that specializes in apartment loans. These are just some of the issues you should address with the apartment lender you choose to handle your loan application.
Here are some of the items lenders will consider when they analyze your apartment mortgage application:
- Property location – most lenders prefer large metropolitan or suburban areas and don’t consider loans in very rural areas. Loans in rural areas are often considered riskier for lenders as these properties are harder to rent. If your property is in a very rural location, make sure to discuss that with the lender upfront.
- Are the tenants signed to leases or are they month-to-month? Is the property subject to high turnover? Are rental concessions necessary to keep the units filled? Lenders do not like apartments that have to fight to attract and keep tenants.
- How is the historical occupancy and cash flow? Lenders like properties with constant positive cash flow and good occupancy history. Major fluctuations in cash flow cause concern for lenders. Lenders like to see occupancy at 90%+. If your property has lower or uneven occupancy, you will need to provide an adequate explanation.
- Is the property in good condition or does it need repairs and/or renovation? A property in need of repairs could create a cash drain and affect the ability to pay the mortgage. Properties in need of work will often lose tenants when newer units come on the market. Make sure to complete major repairs which affect occupancy prior to applying for your loan.
- What are the loan to value and debt service coverage ratios? Underwriters have guidelines which need to be addressed upfront. Most borrowers understand the LTV. The debt service ratio looks at the proposed mortgage payment in relation to the net income. Lenders use this calculation to make sure that adequate cash flow exists.
- What is the credit rating of the borrower? We typically expect to see credit scores above 680. Lower credit scores will require a solid explanation.
- What is net worth of the borrower? Does the borrower have the ability to withstand a temporary setback? Lenders like to see a borrower with reserves, or cash liquidity of typically 5-10% of the loan amount.
- Does the borrower have experience managing property apartment properties? Most lenders will require that a borrower has prior experience owning or managing real estate.
These are some of the questions that a lender will ask when reviewing an apartment building loan application.
Another tip to getting the best rate and best terms is to consult a licensed and qualified commercial mortgage broker. A competent commercial mortgage broker who deals with many different types of lenders has an advantage over going to a local bank. Apartment mortgage brokers represent not only local banks, but agency lenders, national commercial banks, insurance companies, Wall Street CMBS lenders, credit unions, and private lenders. A wide choice of lenders will increase the likelihood of obtaining the best rates and terms available in the market.
If you have a question about refinancing an apartment building or anything related to apartment mortgage lending, please don’t hesitate to contact me at 1-877-548-9454.