Apartment Financing

[KyJoe]

My buildings are financed through a local bank. It's easy to get the loan, and I have a great working relationship. I can buy pretty much whatever building I pick with them, they will tie a new property to an old one. I haven't put up any money down on one for qiute some time. The downside is I would like to get some better rates. On a current loan I will pay 8.5%, over 20 years, fixed for the first 5, floating after that (other local banks don't offer anything better). I looked at a 100 unit building a few years ago, and it had a non recourse loan on it. Where should I look for better rates/terms? I would add that the mortgage brokers that I have talked to seem to be interested in 4 plex or under. Mine are mostly bigger. Any ideas?

 

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[SteveO]

There are a few loans that have decent rates. Fannie Mae has an apartment lending program. There are also conduit loans out there that use wall street money and securitize the funds. Both are just above 6% last time I checked. Call an apartment loan broker that specializes in these types of loans.

There are some banks that are aggressive as well. Try LaSalle or Washington Mutual. Their rates are a bit higher but not much. You save a lot of money on the upfront fees and usually have lower prepayment penalties.

I know there are HUD and insurance loans out there as well. I have never used them though. HUD loans can lock you in for a 35 year rate but the process is very long.

 

[Wolfgang5150]

When you get into larger properties, do the banks still require 20 percent down? I have good relationships with local lenders for my properties - just trying to see what it takes to get the 20% for larger proprties. (Just started Volluci's book, BTW).
Or do you re-fi the existing proprties you have?
Trying to learn how to take the next step - 8, 10 units, to 40+ size properties.
Thanks in advance.
Kevin

 

[AroundTheWorld]

I was wondering ... at what point do non-recourse loans become a more viable option?

Oh boy..... a can of worms has been opened up with this thread! Now all the questions about commercial lending will come creeping out of the shadows!

 

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[SteveO]

Conduits were pretty good at getting better than 80% for a while. I was promised 90% once but they pulled it when the turmoil hit the loan bond buyers a few months ago. I had to drop the deal as a result.

The market is in a state of change right now so, I may be passing on a bunch of nonsense.

Once you top the 5M and then again around the 10M loans, the rules change. There seems to be a lot more flexibility in the programs. You will need a good contract attorney for these loans as many of the pieces are expected to be negotiated. My attorney does all sorts of markups and we send them back expecting to get many of them changed.

Purchases and refi's that are stable and operating decently are easy to get non-recourse loans on. The process for obtaining these loans are fairly intense and filled with costly processes. It probably doesn't make sense to go through this expense unless the loan amount is over 4M.

 

[randallg99]

my experience with commercial loans have required collateral and personal signature. One of the loans I secured in year 2002, I was able to obtain a 10 yr loan, re-set after 5 years and the rate was fixed at 200 basis points over the 5 year note. I originally locked it in at 5.03%. Prepayment penalty was zero after 4 years.

In hindsight, I would not have achieved ownership of the buildings now had I signed nonrecourse loans which would have required significant upfront fees and a much higher monthly payment due to a much higher interest rate.

However, I am now interested in finding out more information on nonrecourse loans now that I am engaging partnerships and LLCs to buy future properties. I will speak with Wamu this or next week. (thx SteveO)

Wolfgang asked >>>Or do you re-fi the existing proprties you have?<<< (to obtain 20% deposit money)

I did that only once. I am a firm believer in having significant collateral in the real estate and using cash to eliminate exposure. I know of more than one person who is getting slaughtered in the down market using too much leverage. His credit will be ruined and he has lost some properties and will probably lose the rest of them.

A friend who owns over 1mil sq ft of commercial space conjured with me that real solid equity in real estate holdings is the way you stay alive in a down market.... and that no area of real estate is immune from downturns and being equity rich is the best protection.

 

[Wolfgang5150]

Great advice all.
Thanks.
Kevin

 

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[KyJoe]

Wolfgang I usally tie the next propert to an existing property. When I first started, I about killed myself coming up with the 20-25% for the next property. Of course you want to make sure it will work, each of my properties will stand on it's own, and several are free & clear.

The property that I looked at 2 years ago with the non recourse loan was 3.3 million. I could have bought it for 100k down, the loan was transferable. I think it was through GE? Basically someone had bought the property, then took out this loan for the max. amount that they could & then wanted to sell it. I came close, it still worked, but the reason I didn't was because it was 60-70% full of section 8. That program works for some, but hasn't for me.

 

[JesseO]

Great advice, Steve. Thanks for starting this thread, Ky =)

 

[Wolfgang5150]

'When I first started, I about killed myself coming up with the 20-25% for the next property'
Joe - This is exactly where I am at. I have good equity in my properties, but it's a slow process to get 20% for the next move. My properties cash-flow well, but I really don't want to re-fi; I would like to pay them down a bit more...I need to explore how to tie in properties more...
Thanks.
Kevin

 

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[KyJoe]

For some reason I never read about tieing the properties together in any of the books. I sold a building to a well off real estate agent, and she mentioned it. It was like a light bulb going off. Just make sure you still cash flow.

 

[Wolfgang5150]

Joe:
So in laymen's terms. You are using the equity you have in one property as collateral on the other property, correct?
Very interesting dynamic..........
Kevin

 

[jimculler]

Cross Colateralization is the term used to describe the lack of down payment needed when they use the equity in another property towards your down payment.


The absolute lowest rate I have seen this week in Multifamily (5+ units) financing was 6.15% for a 5 year fixed. But it is ranging anywhere from 6.25-6.5 for creampuff - up to 9.75 and prime plus floating loans with hair. In commercial it just really depends on a lot more factors.

Yes there are way better rates than your local bank has to offer.

Shoudl we talk about Non Recourse in another thread? I can start one to describe it in full detail if people think that would help out the group.

 

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[AroundTheWorld]

Shoudl we talk about Non Recourse in another thread? I can start one to describe it in full detail if people think that would help out the group.

Here would be great. I'd love to hear what you have to say about it!

 

[Wolfgang5150]

Doesn't matter to me; I will read it and ask questions.
Thanks for the information.
Kevin

 

[KyJoe]

Yes that's correct Wolfgang, at one time I had three properties tied to one that was paid for. I had all of them removed several years later without refinancing once I had substantially more equity in each. I used the same property as collaterial for my current project, a 24 unit condo building.

I am not saying to build a house of cards with this method. You have to be careful. I have a really good friend that has done this, but also borrowed the max. amount that the bank would lend. He and his bank have gotten (several million owed) into such a mess. So bad in fact, that the bank has been making him loans to cover the payments for the last several months. I had never heard of that until now.

I would love to discuss what anyone knows about non recourse loans and any other source.

 

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[SteveO]

I have always found it to be more efficient to sell and trade into another property as opposed to cross collatoralizing. My process is designed to roll into larger complexes rather than add to existing.

There has only been one property in the portfolio to date that has been around more than 3 years. That is in the process of changing though. As they reach the 100 unit plus mark and become financed on non-recourse, low interest loans, they are being held for longer term.

There are plenty of low interest, non-recourse loans out there. The problem is finding properties that will fit into the criterial required by this financing. My preference is to find them that are not performing well and acquire them on a bridge loan. The next step is to improve operations. The choice then becomes whether to sell or refinance on better terms.

 

[yellowpad]

Talk to a qualified mortgage Broker and work with him/her to crunch out some numbers that make sense to the deal. The reason I say Broker, because they have many lenders in their portfolio to work with in oppose to the bank that has one guideline and few programs.

 

[Wolfgang5150]

Thanks - I just found out my local bank (that I have one of my properties with), offers this. This is priceless information that I have learned here. Thanks!
Kevin S.
Orchard Park, NY

 

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[NotesRog]

Apartments are the sweethearts of the commercial lending world. You can get a non-recourse loan typically at about $2M+.

With the current credit crunch, many lenders do not know how to price risk, but there is still plenty of cash for deals out there.