Buying an apartment building isn’t the same as purchasing smaller investment properties. The payoff can be higher (assuming your investment goes well), but the risk may be higher as well — both for you and the lender.
On the plus side, a multifamily apartment building can have excellent income potential. It might generate consistent cash flow and grow your real estate portfolio. Plus, when you have a vacancy (or even a few vacancies), they likely won’t impact your bottom line like a vacancy in a single-family rental property would.
On the other hand, apartment complexes aren’t very liquid. They can take time to resell if the need arises. As a result, lenders often consider apartment loans as higher risk.
Due to the increased risk, qualifying for apartment building loans can be a financial challenge. You’ll generally need a lot of money upfront in the form of a large down payment and significant reserves. Lending standards, however, may be easier to satisfy. Commercial lenders care more about the value of the property than your personal credit qualifications.
5 Types of Apartment Loans
Despite the risk, there are multiple ways to finance the purchase of an apartment building. You’ll probably have several options to choose from when you start searching for commercial loans for a multi-family apartment complex.
Having multiple loan options is good. It means you don’t have to settle for the first option you find. Instead, you can take your time to look for the best option available for your situation.
Below are five common types of multifamily apartment loans. We’ve broken down the highlights of each to help you compare your options.
Fannie Mae Apartment Loans
Fannie Mae’s Multifamily platform has numerous loan programs that might help you in your search for affordable apartment loans. You can borrow as little as $750,000 with loan terms potentially as long as 30 years.
Fannie Mae’s multifamily financing options include:
You’ll typically need a down payment of 20% or larger to borrow. Because the federal government backs the loans, they represent less risk for lenders. Therefore interest rates tend to be competitive when compared with other financing options. Still, you should always shop around for the best rate and terms to be sure.
Freddie Mac Apartment Loans
Through its Optigo program, Freddie Mac provides several options to consider when you need multifamily housing loans. Whether you want to borrow $1 million or $100 million to purchase a real estate investment, Freddie Mac might have a solution that can help.
Freddie Mac’s multifamily Optigo loan offerings include:
If you qualify for an Optigo loan for a purchase or refinance, you can generally expect competitive interest rates compared with other apartment building financing options. The federal government backs these loans as well — reducing the lender’s risk.
Your repayment terms on some of the program’s fixed-rate loan options could potentially extend as long as 30 years. In general, you’ll need a sizeable down payment (20% or more) to qualify for funding.
Bank Balance Sheet Apartment Loans
Bank balance sheet apartment loans are another type of commercial financing you can use to purchase an apartment building. However, banks don’t package up and sell these loans to a government-sponsored enterprise (GSE) like Fannie Mae or Freddie Mac after closing. Rather, the loans are kept in house and sit on the bank’s balance sheet.
Balance sheet loans are available from many traditional banks, but online lenders and life insurance companies may offer them as well. The loans are often full recourse loans, which means you can be held personally liable for the debt if something goes wrong. In other words, the lender may be able to seize your personal assets to try to recuperate its losses.
Your personal credit score may also be reviewed as part of the application process. So, a better credit rating might help you land a better deal on financing. Need to review your credit? Nav’s platform gives you access to your personal and business credit information in one spot.
Expect to pay at least 20% down for a bank balance sheet apartment loan. However, you might need to provide a more significant down payment depending on the lender’s requirements.
FHA Apartment Loans — Existing Properties
If you’re looking to purchase or refinance an existing apartment building with five or more units, an FHA Multifamily loan could help. FHA 223(f) loans are insured by the U.S. Department of Housing and Urban Development (HUD). HUD lenders package and sell the loans on the secondary mortgage market after closing, allowing for better interest rates and terms for borrowers.
Interest rates can be competitive on FHA apartment loans, but you should weigh other costs and factors too. For example, the funding process has a reputation for being slow and tedious with strict qualification standards.
Repayment terms on FHA apartment loans may extend as long as 35 years. The loans are non-recourse, so your risk is lower in the event of a default. However, mortgage insurance is typically required on these loans, so be sure to factor that into your cost comparisons.
The minimum loan amount for an FHA apartment loan starts at $3 million. For new purchases, a lender may be willing to finance up to 83.3% of the purchase price. This could result in a smaller down payment amount for you, the borrower.
Apartment Construction Loans
Do you want to rehabilitate an apartment building or build a new one from scratch? If so, you’ll need to consider apartment construction loan options instead of traditional multifamily commercial financing.
- Conventional Construction Loans, backed by Fannie Mae or Freddie Mac, may have a program to help you secure the financing you need. For example, the Rural Development Guaranteed Rural Rental Housing Program from Fannie Mae can fund the construction or rehabilitation of eligible multifamily properties. Freddie Mac also offers a Moderate Rehab Loan that can fund rental property renovations.
Rates, terms, and fees vary from program to program. So, your best bet is to contact a Fannie Mae or Freddie Mac lending partner to review your borrowing options.
- The FHA 221(d)(4) loan, guaranteed by HUD, can help you finance the construction of a new multifamily apartment building. Minimum loan amounts generally start at $4 million, but most loans are $10 million and up. Financing terms can extend as long as 40 years. You may also be able to take advantage of interest-only financing during the construction period.
- Balance Sheet Loans can also be used to finance the construction or rehabilitation of an apartment complex. Because lenders hold the loans in house, they don’t have to comply with Fannie Mae, Freddie Mac, or FHA guidelines. You can check with individual lenders to learn more about loan rates, terms, and qualification criteria.
Apartment Loan Calculator (How to Calculate Interest)
Finding the right type of financing should be high on your list of priorities when you’re buying an apartment building. When you find the right apartment loan, it could help you to save money and make your investment more profitable overall.
Of course, it can be difficult to tell on the surface which loan is most affordable. Even comparing the interest rate on multiple loans won’t tell you the whole story.
The best way to shop for an apartment loan is to compare all of the terms and costs of multiple financing solutions side by side. You can start by calculating the cost of financing, including interest rates and fees.
Here are links to a few commercial mortgage calculators that may help:
Alternative Apartment Financing Options
If none of the traditional multifamily apartment loans above work for your situation, you may still be in luck. An alternative apartment financing option could be a better fit.
Commercial Mortgage Backed Securities (CMBS)
A CMBS loan, also called a conduit loan, is a non-recourse commercial real estate loan you can use to purchase an apartment complex. The asset-based loans are secured by the property you’re buying. After closing, CMBS loans are packaged and sold on the secondary mortgage market, similar to government-backed loans.
The minimum loan amount for a CMBS is usually $2 million. But the average maximum LTV is 75%, meaning you may need to put down 25% or more to secure funding. You may also need to show significant cash reserves to qualify.
Although the loans may feature a 30-year amortization period, you’ll generally receive a shorter repayment term of 5–10 years. CMBS loans may have a sizable prepayment penalty attached, so be sure to carefully review fees and terms before you commit to this type of financing.
Hard Money Loans
Hard money loans, sometimes called bridge loans, are an alternative form of financing commonly used by real estate investors. Bridge loans are short-term funding solutions and must often be repaid or refinanced in 36 months or less.
If you’re searching for a hard money loan, you probably won’t find one at your local bank. Instead, hard money lenders are typically private companies or individuals.
Hard money loans may fund much faster than traditional property loans. You might receive funding in just a few days if you qualify. However, this convenience comes at a cost. Interest rates and fees on hard money loans may range from 8% to 15%. You may also be required to come up with a 20% to 30% down payment.
If you’re considering a hard money loan, make sure you understand the risks and costs clearly upfront. Pay special attention to origination fees, repayment terms, prepayment penalties, and any balloon payment requirements. (Note: If your loan features a balloon payment, you’ll have to pay off the remaining balance or refinance your investment property by that date.) It’s also wise to research a hard money lender’s reputation online before you apply for funding.
Traditional business loans, such as those offered by the Small Business Administration, usually aren’t the right choice for an apartment loan purchase. Yet there’s a chance you might find a business lender that’s willing to help you finance your investment property.
You can visit the Nav Marketplace to compare available business loan options. It’s also a good idea to review both your business and personal credit reports and scores before you apply for any new business loan.
Can I buy an apartment building with no money down?
Generally, you’ll need a minimum of 20% down to purchase an apartment building. Some lenders may offer a lower loan-to-value (LTV) ratio to help reduce risk. So, if you’re applying for financing with a lender that offers a lower LTV, you might need to prepare for more than a 20% down payment.
How much does it cost to buy an apartment building?
Asking how much it costs to buy an apartment building is a bit like asking what it will cost to purchase a home. The answer to the question depends on a lot of factors, including the location, size, and condition of the apartment complex you want to purchase.
A quick search of LoopNet reveals the following asking prices for apartment buildings in various parts of the country:
- Charlotte, NC: $1,175,000 (19-Unit Apartment Building) – $11,000,000 (128-Unit Apartment Building)
- Las Vegas, NV: $450,000 (8-Unit Apartment Building) – $29,000,000 (278-Unit Apartment Building)
- New York, NY: $2,600,000 (4-Unit Apartment Building) – $63,000,000 (67-Unit Apartment Building)
If you’re serious about purchasing an apartment complex, your best bet is to save aggressively for your down payment. Let’s assume you save $100,000. That would be a 20% down payment on a $500,000 property.
Once you (or you and a group of investors) have gathered enough money for a down payment, an experienced commercial real estate agent or business broker can help you search for available properties in your desired area. If you prefer, you can also attempt to manage the search process yourself.
This article was originally written on November 28, 2019 and updated on September 9, 2022.