Real estate investors use commercial apartment loans to finance the construction, purchase, or refinance of a rental property in the form of an apartment building, mobile home park, or other multifamily property. Many different types of commercial apartment loans are available, including Freddie Mac and bridge loans.
Each apartment financing option has its own set of terms and conditions. The most important terms include the loan amount, interest rate, term length, and prepayment penalty.
Commercial apartment loans are available from many lenders, including government-sponsored enterprises (GSEs) and traditional banks.
What Are Commercial Apartment Loans?
Commercial apartment loans are a financing solution for buying or refinancing an apartment building. Investors can take advantage of a commercial apartment loan for a variety of purposes, which include:
- Financing the purchase of an existing apartment building
- Refinancing an existing apartment building loan
- Acquiring and rehabbing an underperforming or distressed apartment building
- Construction loans for building a new apartment building from scratch
They are ideal for investors who plan to rent out the units in the apartment. In some cases, commercial apartment loans can benefit owner-occupied businesses, such as businesses that plan to use the ground-floor retail space for their operations.
Lenders often consider a borrower’s credit score, income, and down payment before extending an apartment loan. They could also consider the property’s location, such as if it’s in a desirable market like New York City or San Francisco, and the loan-to-value ratio (LTV), which compares the loan amount with the apartment’s appraised value.
Commercial apartment loans allow investors to leverage their capital by borrowing a larger loan size than they could with a traditional residential mortgage loan. This can help investors maximize their return on investment (ROI).
What Are the Different Types of Commercial Apartment Loans?
Commercial apartment loans are an essential financing option for investors looking to purchase or refinance an apartment. The terms and conditions of each type of commercial apartment loan vary depending on the lender and the borrower’s creditworthiness.
For example, the U.S. Small Business Administration’s SBA loans — both the SBA 504 and SBA 7(a) loans — are only for owner-occupied properties and not eligible for rental real estate investments. Real estate investors can choose from various apartment loans, from government-backed financing to traditional loans.
Traditional Bank Loans
Traditional bank financing is one of the most common approaches to acquiring commercial apartment loans. People typically obtain these loans through a local bank or credit union. The terms and conditions of traditional bank financing can vary greatly depending on the lender.
One of the main benefits of traditional bank financing is that it is often easier to qualify for than other types of loans. Banks are typically more willing to lend money to borrowers with a good credit history, proof of income, and a solid financial track record.
Another benefit of traditional bank financing is that it can finance apartment properties virtually anywhere. This flexibility can be beneficial for investors who are looking to purchase properties in multiple markets.
The downside of traditional bank financing is that it generally comes with higher interest rates than other property loans. This means that borrowers will need to factor in the cost of interest when considering whether or not this loan type is right for them.
Freddie Mac and Fannie Mae
Considered government-sponsored enterprises (GSEs), Freddie Mac and Fannie Mae provide respective loan programs that give borrowers various apartment loan structure options.
Both GSEs also offer a wide variety of property types, such as apartments and multifamily homes, and include financing options for student housing, senior housing, and affordable housing.
When applying for a Fannie Mae loan, investors must demonstrate their industry experience by presenting a formal application and a business plan detailing how the loan proceeds get used. Fannie Mae’s apartment and multifamily loans are amortized for up to 30 years.
With flexible loan options and a low debt-service coverage ratio (DSCR), a Freddie Mac loan can be an excellent option for investors. The program offers a low loan rate, 30-year amortization, and low fees. While the fixed-rate loans are traditionally for larger apartment complexes, Freddie Mac provides an ideal entry point for investors seeking to enter the multifamily rental market.
Bridge loans are a quick way to fund a commercial apartment property. Unlike the traditional loan process, they tend not to require credit checks, tax returns, or income proof. Often used to buy properties at a significant discount, bridge loans can cover costs associated with renovations before selling or refinancing.
For example, let’s say that property costs $100,000 but needs $25,000 in improvements. The total project cost is $125,000. A lender will offer a bridge loan worth 75 percent, so you’ll only have to cover the remaining $31,250.
In most cases, you can use your current home or investment property as collateral. Typically, bridge loans will take six to 24 months to pay off. Interest rates will be up to 17 percent. Some lenders may charge a prepayment penalty, but it will depend on the situation.
A commercial mortgage-backed security (CMBS) loan is usually secured by a pool of commercial mortgages. CMBS loans typically finance purchasing or refinancing commercial properties that produce income, such as office buildings and apartments.
CMBS loans tend to be non-recourse loans, meaning that the borrower is not personally liable to repay the loan if the property is sold or foreclosed upon. Instead, the repayment of the loan is guaranteed by the cash flows from the underlying properties.
One benefit of CMBS loans is that they often have lower interest rates than other commercial real estate loans. Additionally, CMBS loans can finance acquisitions and refinance, providing flexibility for borrowers.
What Are the Benefits of Commercial Apartment Loans?
There are many benefits to taking out a commercial apartment loan to finance your investment property. You could receive a lower interest rate than if you were to finance the purchase with a traditional mortgage, which can lead to increased savings.
Commercial apartment loans usually have shorter terms than traditional mortgages, meaning you could pay off the loan faster with less interest paid over the life of the loan. And, because the apartment property secures the loan, you may get more favorable loan terms and conditions than with an unsecured business loan.
By using a commercial apartment loan to finance your investment property, you can avoid using personal assets as collateral, though bridge loans are an exception. This can protect your finances if unexpected issues arise with the investment or the apartment is foreclosed upon.
How To Compare Different Commercial Apartment Loans
Commercial apartment loans differ from traditional mortgages in a few key ways, so it’s essential to understand the differences before applying for a loan. Here are a few factors to compare when looking for a commercial apartment loan:
- Interest rate: Research lenders to find a competitive interest rate loan to save money over the life of the loan.
- Repayment schedule: This dictates how much you will need to pay back each month, as well as the total amount you’ll need to repay over the life of the loan.
- Loan term: The length of the loan term may impact your monthly payments, so compare terms from different lenders. A longer loan term may have lower monthly payments, but you’ll pay more interest over time.
- Fees: Many loans, such as those associated with closing costs, come with a fee or charge. Fortunately, some costs may be negotiable, so it’s always worth asking about them.
- Prepayment penalties: Some commercial mortgage lenders charge prepayment penalties if you pay off your loan early. This is something to consider if you want to sell your property or refinance your loan.
By considering all of these factors, you can do your due diligence by comparing a variety of commercial apartment loans and finding the one that best suits your financial goals.