When it comes to purchasing commercial or multifamily real estate, applying and getting for a multifamily loan can be difficult. Keep in mind, getting a loan on an apartment building is primarily dependent on what kind of cashflow the property is producing. So, even though a lender may be willing to lend up to 80% Loan-to-Value, the property must be able to service the debt.
Getting a multifamily loan, or any real estate loan for that matter, can be a long and arduous process. As long as you understand how the lenders qualify the property, or work with a professional who can walk you through the process, I personally think the process of getting a multifamily loan is easier in most respects. The biggest stress is generally getting the loan amount you need. Since the loan amount is determined based on the cash flow, you’ll want to take some steps to ensure the building is operating as efficiently as possible.
If you are purchasing a building, the operations are out of your control. In that sense, you’ll need to make sure you understand your options based on the property’s current performance and perhaps negotiate with the seller to work with you on achieving the highest loan amount. Afterall, unless they’re selling to an all cash buyer, they can’t sell their property if the buyer can’t get financing!
For example, in California, achieving a maximum loan amount is usually difficult in competitive markets like San Diego, San Francisco and Los Angeles. In these areas where cap rates are as low as the 3’s, the property rarely cash flows to the maximum loan-to-value. As a rule of thumb, the lower the cap rate, the higher the down payment.
This is where a mortgage broker can be beneficial. They will step in and figure out the best way to maximize the loan amount and get the financing you need. A broker works with many different lenders and knows their lending guidelines, the types of properties they like to lend on and can negotiate the best terms.
So, here are some tips to help you get the highest loan amount on your apartment building.
1. Increase the Gross Income
One way you can do to get your multifamily real estate loan is to increase your property’s income. Are your rents below market? Consider rent increases. If you have onsite laundry, have you checked to make sure you are charging what is common in the area? Are there other ways you could be generating income such as parking, storage, pet rent, etc?
You will need to make sure rent increase notices are delivered as soon as possible. Typically, lenders will require rent increases to be in place prior to closing.
That said, I’m not suggesting you gouge your tenants. But, this is a business. A prudent business owner wants to make sure they are competitive and know the market. They also want to run a profitable business. Keeping rents in line with the market will ensure you’re operating your business profitably, you can get the most advantageous financing and avoid your property being grossly under market (and therefore not as valuable since your building is valued based on Net Operating Income).
2. Implement RUBS
Another way to maximize your loan amount is to implement RUBS (or ratio utility billing system). This may or may not be common in your area so you will want to check that first then also make sure you comply with the rules and laws of your city or state.
What are RUBS? This is a way of charging the residents for utilities including gas, electric, water, sewer and trash. If the property doesn’t have separate meters for each unit, then you are paying for these utilities. Many clients have asked about getting their property separately metered, that is very costly. So alternatively, you can hire a company or bill the utilities yourself. Most companies use a formula that is an average of the square footage and number of occupants to divide the bill and determine each resident’s share of utilities. Oftentimes, water and/or gas is billed at 75% of the total bill to account for common area expenses such as common laundry and landscaping.
I like RUBS for a few reasons – 1) Where I live, utility costs are constantly on the rise and this is a good way to protect your cash flow against rising costs, 2) if your resident’s are paying utilities, they are more likely to be more conscious of their usage.
3. Reducing Expenses
One way to get the highest loan amount is to reduce any property expenses. This may seem obvious though I review a lot of property financials! There is only so much you can do about maintenance expenses and we can capitalize any large one-time or unusual expenses. Items like new appliances, flooring replacement, cabinets and fixtures can all be deducted from the expenses if needed.
What I typically see are things like insurance or trash costs that are much higher than is typical. Those may seem like relatively small expenses but if we’re close on the loan amount it can make a difference. You also still want to make sure you’re maximizing your cash flow and operating efficiently and those are a few easy items to check off the list and save money.
If you have a property manager, you want to make sure their fees are competitive for the service you are getting as well. A good property manager is worth their weight in gold (and then some!) but a property manager who is over charging and not watching expenses means you aren’t getting the return on the investment that you should.
When you’re going to get financing, it’s a really good time to take a look at your expenses and see if you can do a refresh. Most property owners are not reviewing their expenses on even an annual basis. I highly recommend an annual review to see if there are new vendors, deals and ways to save money on the property.
These tips are not just useful when getting financing, it’s good practice in general to look at your expenses periodically and see where you can improve. As a real estate owner and investor, it’s your job to look out for your investment and why not maximize its potential, create more value and generate more cash flow?
At Pacific Shore Capital, we work with you to make lenders give you the maximum loan amount for an apartment building. Check out and follow our podcast if you want more views and advice on any real estate needs and issues.