There are many types of financing for apartment complexes. We will take a look at some of the loans and features that we see quite often, and how they benefit apartment owners.
First, let’s discuss some of the terminology used when talking about loans:
LTV - Loan-to-value
The LTV can vary widely depending on the loan. Loan to Value is the ratio of the mortgage of the property to the value of the property. For example, if a property is worth $1,000,000, and the bank will lend $750,000, the LTV is 75%. That means the down payment would be $250,000, or 25%, plus closing costs.
CapEx - Capital Expenditures
The CapEx is a big component in the value add strategy. Capital expenditures are used when renovating a unit, re-siding a building, putting a new roof on, or adding a playground. These are not part of the operating expenses of a property. Some types of loans will pay for some or all of the CapEx.
Interest Only Period
One of the benefits of financing for apartments is that most loans offer an Interest Only (typically referred to as I/O) period. During this period, only the interest is paid and the principal is not paid. This allows for a better cash flow.
Fixed rate vs Floating Rate
A fixed interest rate does not change. A floating rate does change, and it can change quite often.
Interest Rate Cap
Some companies sell an insurance policy to cap rising interest rates. For example, if you buy a 2% interest rate cap policy and your initial rate is 4.5%, you will need to pay for the interest up to 6.5% (4.5% of the initial rate + 2% before the insurance policy kicks in). Any interest rate over 6.5% is paid by the interest rate cap insurance policy.
Agency vs Bridge
A loan that comes from Fannie Mae or Freddie Mac can be referred to as an ‘agency’ loan. Agency loans will typically offer a lower LTV and cover less of the CapEx, but will typically have better terms like a lower interest rate, lower fees, and a longer I/O (Interest only) timeframe. These are backed by the government.
A bridge loan will have higher fees, offer a higher LTV, and can cover most or all of the CapEx budget. There are benefits to each type of loan and different risks associated with each.
If the LTV is higher, less money is needed from investors, which can typically mean a better overall return for investors. When interest rates are rising, a fixed interest rate is likely better than floating, assuming the fixed rate is low. A longer interest only period is usually better for investors as the cash flow is better than if you paid down principal.
All of the loan terms can vary greatly. Our team looks at many types of loans to determine the best loan for our strategy. We work with a mortgage broker and not direct lenders. A mortgage broker has relationships with 20+ lenders and can find the best terms for our strategy and business plan. They end up saving us time and money in the long run because they are so well connected with lenders.
To learn more about apartment financing, please visit our Knowledge Center. To find out how you can passively invest, please schedule a time with us or contact us, and we will reach out to you.