There’s
no shortage of options when it comes to apartment loans for multifamily
financing. Check out the decision making factors shared below to best decide on
a commercial apartment loan lender.
If
you are reading this, means you have decided to buy and apartment building.
Diversifying your portfolio with a consolidated source of passive income is a
savvy move. Go ahead and pat yourself on the back. While finding a multifamily
property that matches your investment criteria and experience is no cakewalk,
you aren’t done with the tough choices just yet. There’s no shortage of
products to consider when it comes to financing your multifamily investment.
First, the major players involved.
Apartment
investors spend a lot of time weighing the pros and cons of bank and agency
loan products. While there is no right or wrong choice, you must arm yourself
with the knowledge needed to determine which loan product works best for your
investment. So, let’s jump into some specific terms.
Resource vs. Non-Resource:
The
biggest differentiation between bank and agency apartment financing is whether
the loan is recourse or non-recourse. Fannie Mae and Freddie Mac apartment
loans used to buy or refinance apartment buildings are non-resource, meaning
that the debt is secured only by the loan collateral. If you default on a
non-recourse loan, the lender can only recoup the pledged collateral. They
can’t go after your personal assets. One of the biggest benefits of working
with non-recourse lenders is that your personal liability is protected.
Apartment
loans financing from a bank usually comes in the form of a recourse loan. This
means that you and your partners are personally liable for the full apartment
loan amount in the event of a default. If the property sale doesn’t cover the
loan amount, the lender can go after assets that were not used as loan
collateral. Sometimes banks will offer non-recourse refinancing, but the risk
is often reflected in a higher interest rate.
Pricing & Flexibility of Best
Rate Apartment Loans:
While
the non-recourse loans offered by Fannie Mae and Freddie Mac help you sleep
better at night, recourse apartment loans tend to offer more flexibility when
it comes to loan structure and pricing.
You may ask why? Because it is more difficult to recoup on a
non-resource apartment loan, lenders are going to impose more restrictions on
what you can do with your apartment buildings. Their goal is to keep the
apartment asset competitive and in good repair. As such, apartment loan
provisions might include capital expenditure and maintenance schedules.
Recourse
apartment loans from banks tend to offer a slight advantage on interest rates.
That being said, recourse multifamily apartment loans are typically structured
with a floating interest rate spread over an index. Fannie Mae and Freddie Mac
apartment loans can be locked in at a fixed rate, and can offer better
long-term fixed-rate loan terms than banks if you are looking to set it and forget
it.
Agencies,
like ALB Commercial Capital, also have the benefit of higher leverage which
tops out at 80% loan to value in certain markets. Banks usually top out around
75% LTV.
Speed of Execution:
Traditional
wisdom would steer you towards a bank loan if you are looking for speed or
execution above all else. However, recent developments in online technology now
allow lenders to streamline the documentation process on Agency loans. Fannie
Mae and Freddie Mac products are now catching up to the quick loan process
Banks have been known for.
While
Agency supporting apartment loan programs are standardized when it comes to
requirements and terms, not all lenders are built equal. Finding an experienced
lender and attorney are two ways to ensure the fastest agency financing
possible.
Servicing & Beyond:
Banks
usually keep your apartment loan on their own balance sheet, so you can expect
to work with a single entity over the course of your loan. Smart investors will
find an Agency lender that maintains an in-house point of contact for servicing
over the life of their loan. Some agency lenders hand off your financing to a third-party
manager after the loan is sold to a GSE for securitization. This can present
some headaches when it comes time to refinance or sell your apartment property.
You
are also going to want to consider prepayment penalties. Bank loans typically
feature a 1% prepayment penalty, while Agency backed apartment loan programs
have declining prepayment penalties or yield maintenance.
Buying
a new home can be an exciting and sometimes overwhelming endeavor. Part of the
challenge is finding an apartment loan that is right for you. Here comes the necessity
of hiring a professional-cum-business friend to not only get the top-class
apartment loan options but also professional advice that will make the process
of getting best rate apartment loans much easier for you.
