When youâ€™ve got your eye on a new multi family apartment building, youâ€™ll most likely want to use a commercial loan to buy it. So how do you go about choosing a lender?
First off, understand that commercial lending is very different from residential mortgage lending. Rates are slightly higher â€“ usually one point or so â€“ because the lender knows that the loan isnâ€™t secured by your own personal residence, as is the case in residential real estate lending.
When you choose a lender, you want someone who understands the commercial real estate business, knows the local market, and knows the ins and outs of commercial loans.
For example, if the multi family apartment you are buying contains five or more units, you can usually obtain a 75% loan-to-value ratio. This means that for a 6-unit building appraised at $500,000, you can get a loan for $375,000. Thus, your down payment will be $125,000.
However, if the multi family unit you want to buy happens to be in one of the 10 most expensive zip codes,
then your lender might require you to make a down payment of 30% to 50%. So for that same $500,000 building, youâ€™ll need to put down $150,000 to $200,000.
In those more affluent areas, commercial lenders will generally do loans for higher dollar amounts than in average locations, but the multi family apartment building still has to produce enough revenue for you to service the debt. Rest assured the lender knows that, and he or she wonâ€™t make the loan without doing due diligence to make sure youâ€™re not getting in over your head.
How much should you expect to pay for a property? Your lender should be able to give you a rough guideline, but generally, in most parts of the county you can buy multi family apartment buildings for anywhere from six to eight times the annual rents. In affluent areas, make that nine to eleven times the annual rent.
So buying in a less-expensive area lowers your cost per unit, but you wonâ€™t get as much rent. Buying in an affluent area brings in higher rents, but your purchase price is higher. You will have to perform a balancing act between the two by considering your financial investment capacity.
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