A Guide for Investing in an Existing Multifamily Project
Investing in a multifamily residential asset, such as an apartment building, provides a great opportunity to achieve substantial personal wealth.
This short guide can help you begin to understand what a borrower should know about investing in an existing multifamily project:
Step 1: Qualify
A lender will consider many different factors before approving you for a loan. Relevant experience is always a big plus, but then they’ll also want to see things such as:
• Property income and expense statements for the past several years
• Annual average occupancy rates for the past several years
• Current rent roll, including detailed information on the underlying lease
• Personal financial statements and tax returns for each of the owners who will hold more than a 20% interest in the project
• Sufficient owner(s) liquidity and collateral necessary to cover any required down payment or equity injection, which will almost always be 25% or more
Step 2: The Loan
The loan’s term can range anywhere between 5 and 30 years, with the interest rate being fixed, variable, or some hybrid thereof. The loan can be recourse or non-recourse (no personal liability), but the lender will always keep a lien on the underlying property and any other pledged collateral in order to protect its financial interest in the property. The LTV (loan-to-value ratio) is another way the lender protects itself, by assuring that if the lender had to take over and sell the property that there would be enough equity available to make sure the lender would receive most if not all of its monies.
Other things to consider are that as a borrower you are also going to be expected to set aside monies for items such as real estate taxes, insurance, and capital reserves. When the lender is looking at the property’s cash flow, they will typically account for such items in order to make sure there is enough free cash flow to cover the debt service on the property. During the course of your loan, your lender will be closely monitoring whether the minimum DSCR (debt service coverage ratio) is being maintained and the event it is not they will take steps to stabilize the situation and protect everyone’s interest in the project.
Step 3: Business Entity
The most common type of entity formed by an investor who is acquiring a multifamily asset is a limited liability corporation (LLC). However, there are other options you may want to consider as well, such as a special purpose entity (SPE). You will definitely want to involve a good attorney and accountant from the beginning to help guide you through the decision making and implementation process. The primary reasons you want to form some type of entity to own the asset is to both protect you from incurring personal liability and to provide you with the best tax treatment possible.
Step 4: Supporting Documentation
Some other things that you can provide your potential lender up front, and which will help you secure the financing you need for your project, includes:
• Business plan
• Market study
• Photographs of the property
• Copy of the listing
• Purchase agreement or LOI from seller
Wexum can help you find the financing you need to make your next multifamily investment. We have unbelievable refinancing options available as well. Contact us to learn more and to obtain a no obligation quote.