Owning an apartment building is a high-maintenance undertaking that can be even more complicated without appropriate financing. To finance your apartment building, you need to find the right lender to obtain a commercial loan. Unlike conventional mortgages, commercial loans vary wildly in rates, terms, fees and overall structure.
The key to financing an apartment building is to find the right lender. Although an apartment building is technically a multifamily property, loans to apartment building owners are considered commercial. This is because you use the property to generate income instead of as a residence. Commercial rates vary by lender. In fact, most lenders don't have set rates; rather, they determine the rate based on the strength of the deal. To get the best rate, you should have strong credit, capacity to repay, and enough value in the building you'll be offering as collateral.
When you choose a lender, set up an appointment to meet with a loan officer. Make sure you are prepared before going in. The lender will want details on the financing: specifically, the purpose, amount and term of the loan. The lender will also require that you provide three years of financials both personally and, if applicable, for the business under which you own and operate the apartment complex. It will use this information to determine if you qualify for a loan.
Approval and Pre-Closing
If the lender determines you qualify for the loan, it will send you a commitment letter outlining the terms. It will also list the closing conditions. First, you will obtain title insurance. This insures the lender's lien against your property. The title company will ensure that the apartment building is free and clear of any liens, that you have no judgments against yourself or the business, and that your business is registered and in good standing in your state. It will also obtain an appraisal to make sure the value of the collateral is sufficient and a Phase I environmental study to make sure no hazardous conditions exist in or around the property. If any issues arise during this process, these can delay or even kill the loan.
Once all searches are in and all parties are ready, the lender sets a closing date. You attend a settlement where you sign the loan documents and pay all applicable fees. The most important documents you sign during this process are the promissory note, mortgage and assignment of leases and rents. The note outlines the terms of the deal and is your promise to repay. The mortgage is recorded with the county and places a lien against the building. The assignment of leases and rents is also recorded and gives the lender the right to continue collecting rent from your tenants if it forecloses on the building.