4 Loan Options for Apartment Property Rehabilitation
4 loan recommendations for the rehabilitation of an apartment property.
Rehabilitating an apartment property can offer an incredibly rewarding investment experience. Rehabilitation as an investment strategy in the housing and multifamily sectors has almost always been a viable option for turning a profit — providing the investor chooses the right financing vehicle for the process. Apartment rehab loans are in no short supply for investors looking to improve a property’s value, but with a growing number of options, how do you select the right rehabilitation loan that meets your needs?
To demystify your options, we’ve rounded up four of our favorite rehab loan products to clearly identify the strengths — and weaknesses — each product presents. Without any further ado, if you’re an investor looking for a solid rehabilitation loan, you might want to check out any of the following four.
1. HUD 223(f) Loans
The HUD 223(f) loan program may not be specifically designed for rehabilitation work, but that doesn’t disqualify it from being a great financing vehicle to get light rehabilitation work done on an asset. The 223(f) program allows for up to $15,000 per unit (multiplied by a local cost factor) for rehabilitation and is arguably the best rehabilitation option for an investor looking to hang on to the property after the work has been completed. HUD 223(f) loans are, after all, lauded as one of the most cost-effective financing options for the purchase or refinance of a multifamily property. With competitive interest rates, high leverage, and fully amortized loan terms of up to 35 years — it’s hard not to agree.
Sample HUD 223(f) Loan Terms
- Minimum Amount: $1 million
- Loan Term: 10 to 35 years
- Leverage:
- Market rate properties: 83.3% LTV
- Affordable properties: 85% LTV
- Rental assistance properties: 87% LTV, 90% LTV for properties with 90% or more rental assistance
- Additional Considerations:
- Assumable
- Nonrecourse
- Supplemental financing allowed
- Minimum Amount: Decided on a per-case basis; adjusted based on leverage and debt service
- Loan Term: Deal specific/negotiated
- Leverage: 80% of as-is value (supported by acquisition price, for a recent purchase)
- Appraisal needs to demonstrate 80% as-improved LTV (with fully funded renovation proceeds)
- Additional Considerations:
- Nonrecourse
- Rehabilitation phase is interest-only with a floating-rate structure.
- Rehabilitation work must be completed within 36 months.
- Minimum Amount: $1 million
- Loan Term: Six months to two years (extension options available)
- Leverage: Up to 75% LTC capped at 70% of the completed or stabilized value
- Additional Considerations:
- Nonrecourse options available (loans over 65% LTC or under $10 million are typically full recourse)
- Higher interest rates
- Minimum Amount: $5 million
- Loan Term: Five to 30 years
- Leverage: Up to 90% stabilized LTV
- Additional Considerations:
- Properties must be fully stabilized within 18 months of loan origination
- Rehabilitation must be complete within 12 to 18 months
What are the best loan options for apartment property rehabilitation?
The best loan options for apartment property rehabilitation are HUD 223(f) loans and bridge loans. HUD 223(f) loans are lauded as one of the most cost-effective financing options for the purchase or refinance of a multifamily property, with competitive interest rates, high leverage, and fully amortized loan terms of up to 35 years. Bridge loans are a popular option for investors looking to rehabilitate a property in a short time frame, and can be funded in a matter of weeks. Bridge loan amounts are typically determined by the total project cost or completed value rather than the as-is value. Sample bridge loan terms include a minimum amount of $1 million, loan terms of six months to two years (extension options available), and leverage of up to 75% LTC capped at 70% of the completed or stabilized value. Nonrecourse options are available (loans over 65% LTC or under $10 million are typically full recourse), and higher interest rates may apply.
Sources:
What are the requirements for an apartment loan?
In order to get a multifamily loan, you would first need to get approved. Approval criteria varies with different lenders and loan types across programs, but in general, borrowers will need to have good credit (660+ is typically expected) and between 25-30% of the total loan amount as a down payment. Additionally, the property itself will need to have a debt service coverage ratio or DSCR, of 1.25-1.30x. This means that the building’s income will need to exceed its annual debt service by at least 25-30%. Skin in the game is equally important in most cases, but that does not mean first time investors are automatically overlooked.
Throughout the loan application process, borrowers will also need a significant amount of documentation, including an appraisal and other required third-party reports. Borrowers will typically be expected to pay for all of this themselves. The required documentation and reports generally include:
- Appraisal: An appraisal attempts to denote the current market value of a property. Appraisals are typically required to be conducted by a professional appraiser currently licensed in the area in which the property is located. Appraisers will generally use a combination of methods, including:
- The income approach, which estimates the value of a property based on its income.
- The sales comparison approach, which estimates the value of a property based on recent sales of similar properties nearby.
- The cost approach, which estimates the value of a property based on the estimated cost to rebuild it, plus the value of the land, and minus any depreciation.
- Property Condition Report/Physical Needs Assessment/Engineering Report: This report observes the physical condition of an apartment property to determine when specific components will need to be repaired or replaced. The report is used to calculate required replacement reserves (funds set aside each year for expected future repair costs). These reports can be requested by a variety of apartment lenders, but are more commonly required for lenders originating HUD multifamily and Fannie Mae/Freddie Mac multifamily loans.
- Phase I Environmental Assessment: A Phase I Environmental Assessment (ESA) examines the area of a property for environmental issues, such as contamination, that could pose a threat to current/future residents or the surrounding community. This could possibly escalate to Phase II and Phase III ESAs if issues or evidence of contamination have been found in the initial Phase I assessment. Phase I ESAs are not always required by lenders, but in most cases are.
- Title Report: Like with the purchase of a single-family home, a title report will make sure that there are no legal claims to a property’s title that could supersede your own.
- Property Survey: A property survey records the boundaries of a property, as well as determining any easements and or other title issues that could impact the property’s use or profitability. This is not always a requirement by lenders, especially if a report is available from the past several years, however, it is more commonly required when potential title issues are found or even suspected.
- Seismic Report: Reports generally only required in areas where earthquakes are common, such as Southern California.
- Zoning Report: May sometimes be required when there are potential issues or confusion around the zoning status of a property.
For small apartment loans under $1MM, eligibility requirements and program highlights include:
- Loan sizes: From $250,000 up to $1 million
- Credit Score: 580 or higher required
- LTV: Up to 80%
- Terms: Up to 10 years or more fixed
- Amortization: Up to 30 years, with interest-only options
- Appraisal: An appraisal attempts to denote the current market value of a property. Appraisals are typically required to be conducted by a professional appraiser currently licensed in the area in which the property is located. Appraisers will generally use a combination of methods, including:
What are the advantages of an apartment loan?
Apartment loans offer a variety of advantages for borrowers. For example, loans backed by the Department of Housing and Urban Development (HUD) offer 35-year fixed rate terms, full amortization, and leverage up to 83.3% for market-rate apartment buildings or 87% for rental assistance properties. Agency loans are also non-recourse, have leverage up to 80%, and offer long amortizations with lots of flexibility. Additionally, agency loans offer low rates and a variety of loan types for specialized properties such as affordable/LIHTC properties, senior living facilities, cooperative apartments, and student housing. Small apartment loans under $1MM from Apartment.Loans offer certainty of execution, 30-45 day loan closing, aggressive terms, white-glove customer service, and multiple loan options.
What are the risks associated with apartment loans?
The risks associated with apartment loans depend on the type of loan you are taking out. For example, with a bank apartment loan, there is typically some form of recourse, meaning that the lender can attempt to go after your personal property in order to repay the outstanding debt if you default on the loan. On the other hand, agency and CMBS loans are typically non-recourse, meaning that the lender cannot attempt to go after your personal property in order to repay the outstanding debt. It is important to understand the terms of the loan you are taking out and the associated risks before signing any documents.
What are the best strategies for obtaining an apartment loan?
The best strategies for obtaining an apartment loan depend on the individual borrower's needs and situation. Generally, it is recommended to explore beyond your local bank to learn of other financing options. This could include Fannie Mae, Freddie Mac, and HUD/FHA apartment loans, which often offer better rates and are generally non-recourse. Additionally, banks can offer financing in situations where other lenders might not (think bridge loans or construction financing) and may even offer lower rates in certain situations. To qualify for an apartment loan, borrowers will need to have good credit (660+ is typically expected) and between 25-30% of the total loan amount as a down payment. Additionally, the property itself will need to have a debt service coverage ratio or DSCR, of 1.25-1.30x. This means that the building’s income will need to exceed its annual debt service by at least 25-30%.
Instead of wasting your precious time and energy trying to figure out everything on your own, consider approaching an experienced intermediary, like the ones we have at apartment.loans. At apartment.loans, they do the work for you, utilizing their strong network of banking relationships to have banks compete against each other to give you the best loan possible.
2. Freddie Mac Moderate Rehab Financing
Freddie Mac is a huge player in multifamily finance, so it comes as no surprise that they offer a solid rehabilitation financing option. Designed with significant rehabilitation in mind, Freddie’s moderate rehab loan program is ideal for investors looking to make anywhere between $25,000 to $60,000 in improvements per unit — with a minimum requirement of no less than $7,500 per unit for interior improvements. The program funds up to 80% of the property’s as-is value and allows interest-only payments during the interim phase of the loan term. These loans can be structured as either float-to-float or float-to-fixed after the interim phase.
Sample Freddie Mac Moderate Rehab Loan Terms
3. Bridge Loans
Apartment bridge financing is a popular option for investors looking to rehabilitate a property in a short time frame. Bridge loans are not a permanent financing option, but can be funded in a matter of weeks — a perfect way to get rehabilitation underway while permanent financing is secured. Bridge loan amounts are typically determined by the total project cost or completed value rather than the as-is value (although in-place income does help to drive down rates). Better still, bridge financing is one of the few options available for borrowers with legal, financial, or credit issues — though they may come at a steeper price under those circumstances.
Sample Bridge Loan Terms
4. Fannie Mae Reduced Occupancy Affordable Rehab (ROAR) Loans
Designed for multifamily affordable housing properties, the reduced occupancy affordable rehab financing program offers rehabilitation funds of up to $120,000 per unit. ROAR loans are so named because they only require a 50% occupancy (and a minimum stabilized DSCR of 1.15x) during the rehabilitation period. The loan is also structured with interest-only payments during the rehabilitation period.