Buying a Commercial Apartment Building

By Louis Jeffries Updated on 7/19/2017

Purchasing commercial apartment buildings is one of the best ways to have a safe, enduring investment that provides immediate income, appreciation and preferential tax treatment. Financing is the key to a smooth investment transaction since a loan is one of the biggest burdens an investor will carry. Fannie Mae provides multifamily and mixed-use financing for commercial properties that are primarily residential. This means if the buyer and the property meet Fannie Mae's easy to follow guidelines, the borrower could qualify for long term financing with favorable terms compared to those offered by local banks.

Let’s explore the major factors that determine if a property would qualify for financing under the Fannie Mae program. Ultimately, these determine if purchasing a property is feasible and profitable.

Property Condition

A primary criterion for commercial government financing is the state of the property as well as periodic inspections to ensure the property maintains minimum standards. There are financial penalties built in the loan to enforce the minimum standards. A real estate investor might say why bother - but the savings are well worth it, especially given that the minimum loans are typically $1,000,000.

Property Values

As mentioned, the minimum loan amounts are typically $1,000,000 and may be as low as $750,000. However, most loans often fall between $2,000,000 and $5,000,000. Most banks require 20 to 25 percent down payment, whereas Fannie Mae allows borrowers to purchase investment property with as little as 15 percent down.

If a real estate investor has the assets to afford an ideal down payment, they are looking for the best return on that investment. Not only does the Fannie Mae program offer extremely reasonable terms, but they are also free from many other conditions that banks may have such as holding your money in their banks as an operating account.

Property Occupancy

The property must be substantial and fully occupied, with vacancy at less than 5 percent for at least 90 days. There is a little variance in the rule although each transaction is considered in sum. For instance, if occupancy is 93 percent and the loan to value is at 75 percent with good debt coverage, financially stable, and a commercially experienced borrower, the 2 percent difference may be overlooked.

Borrower Credit

These apartment loans are often without recourse, meaning, there is no personal guarantee. The loan is granted given the strength of the property, plus the financial strength and history of the borrower. If the borrower or borrowers do not have excellent credit, it will surely be a barrier that cannot be overcome. Even though the property may support the loan, questions about the financial management of the owners could kill a deal. In general, all partners/ borrowers need to have a credit score of 680 or greater, with no major derogatory history.

Borrower Assets

Not only must a borrower have sufficient money for the down payment and closing costs, but also adequate savings to cover at least 10 to 12 months of expenses. Fannie bankers view borrower's global assets to debts. The personal debt and assets of the borrower must meet guideline criteria as well as those of the company. Thus, a borrower cannot put all of their assets into their business if they want to qualify.

Borrower Experience

Experience carries as much weight as financial standing. If the borrower is purchasing a 24 unit building, they must have owned and or managed a similar type of property – not including 24 single family residential homes. Depending on the strength of the deal, Fannie Mae allows the owner to hire a suitable, qualified management company. For smaller projects, this could affect the net operating income calculation, which would reduce the debt coverage.  

Finally, the numbers must point to a profitable investment. If there is positive cash flow and the property can cover the debt and make money, Fannie Mae is one of the best options for financing your multifamily real estate project.