Buying an Apartment Building and Securing Apartment Building Loans

Buying an apartment building can be a smart investment. However, the process of securing financing is often more difficult than other types of commercial real estate investments.


Most apartment building loans are made to companies, rather than individuals. This means that, in the case of a default, the creditors can only pursue the assets of the company, not those of the individual owners.

Buying an Apartment Building

While owning apartment buildings offers a lucrative opportunity, it’s important to understand the added expenses involved. Generally, the main expenses are mortgage payments and maintenance costs. As a result, many investors seek financing to offset these expenses and maximize their profits.

There are several types of apartment building loans, including CMBS, blanket loans and bank balance sheet loan options. These loans can have different terms, interest rates and closing costs. Choosing the right loan for your needs can be a challenge, and comparing options side-by-side is the best way to make an informed decision.

Compared to the loans available for single-family homes, apartment loans typically have higher down payment requirements and require more extensive credit qualifications. Because of this, it can be challenging for first-time buyers to secure the loan they need. However, borrowers can take steps to prepare themselves before seeking a commercial apartment loan.

Obtaining an apartment building loan requires a detailed property analysis, which includes a physical inspection of each unit and copies of existing leases. A financial analysis, which takes into account current and projected cash flow, is also necessary. It’s important to know the property’s gross income minus expenses in order to determine if it will support the debt. If it doesn’t, the investor should be prepared to pay a prepayment penalty to sell the property.

Obtaining a Loan

When buying an apartment building, you will likely need to obtain a loan. While most people think of mortgages when thinking about commercial financing, there are many other types of investment property loans available. Depending on your specific needs and credit standing, you may qualify for an agency, CMBS or bank balance sheet loan.

Agency apartment loans, like those offered by Freddie Mac and Fannie Mae, are typically government-backed and take the longest to fund. However, they generally offer lower interest rates than private, non-government backed loans. CMBS loans, or commercial mortgage-backed securities, are similar to agency loans. However, they are pooled together and sold on the secondary market, making them less reliant on a borrower’s personal financial situation.

Bank balance sheet loans, also known as portfolio loans, are held by the lender that issued them and don’t have to adhere to the same requirements as government-backed investments. This often allows them to have higher debt to income and loan to value maximums, but can also result in higher fees and interest rates.

Short-term apartment loans are ideal for fix and flip investors who need to compete with all-cash buyers on quick turnaround times. Generally, these loans are full recourse and require large down payments. They may also be structured as an LLC, which can provide protection from personal liability if something goes wrong with the investment (barring negligence or other factors that allow “piercing the veil” to occur). Alternatively, the ownership of the asset may be held by a partnership or corporation.

Selling an Apartment Building

Unless you plan to hold an apartment building for your entire life and pass it on to your children, you will eventually want to sell your property. There are many reasons that landlords choose to sell an investment property, including personal circumstances and financial risks.

If you have a loan on your apartment building, the lender will require that it be paid off before the property can be sold. This process can take anywhere from a few days to a couple of weeks, depending on the size and complexity of your loan. You will also need to pay any loan prepayment penalties, as well as customary closing costs such as appraisal, escrow fees and title insurance.

A new owner will probably need to make improvements and upgrades to increase the value of the property. This can include replacing the management company, improving tenant relationships and upgrading amenities. Performing these kinds of value-add renovations can help an investor increase the rent roll and improve cash flow.

It is important for landlords to regularly review their financials and make sure that the trailing 12 month profit and loss statement is showing an upward trend in occupancy levels and rents. Taking these steps can ensure that an investor is ready to sell the property when the time comes. Many investors will also prefer to purchase a property with an existing CMBS loan, as these loans are typically non-recourse and have the lowest entry point of all other commercial lending options.

Managing an Apartment Building

The process of managing an apartment building requires a lot of time and attention. You should hire a contracting company to oversee all repairs and renovations, as well as a management team with experience in multifamily property management. You will also need to make sure that your management team is familiar with the latest laws and regulations regarding housing.

As with any real estate investment, the success of your apartment complex depends on the way it is managed. To maximize your investment, it is essential to keep the vacancy rate low and the rents in line with market rentals. This means that you should monitor your properties on a regular basis, compare them to their maximum market rentals, and make necessary adjustments.

Another important aspect of maximizing your return on investment is effective tenant screening. This includes credit checks, employment verification, and references. You should also enforce all of the terms of the tenants’ rental agreements. For example, it is crucial to enforce the no pets policy. Failure to do so could result in evictions and loss of revenue.

One advantage of investing in apartment buildings is that they offer lower per-unit maintenance costs than single-family homes. This is because they can take advantage of economies of scale, which lowers the total cost of maintaining the building. In addition, they can often be financed based on income rather than the buyer’s personal financial statement, which can be helpful for investors with low FICO scores.