Apartment Building Loans For Credit-Challenged Investors

Apartment building loans require a higher capital commitment than single-family rentals. The upside is they can generate a lot of income for the owner.


Unlike mortgages for single-family homes, the majority of multifamily financing is lent to corporations (or LLCs). This limits liability since lawsuits can only go after the assets of the entity.

1. Appraisal

Lenders take a different approach to apartment building financing than they do with single-family homes and other residential investment properties. They focus more on the property’s income potential and the value of the apartment building itself than on your personal credit score or financial strength.

An appraisal is necessary to determine what the property is worth. Unlike other types of loans, where an appraiser uses building plans and a construction budget to estimate value, apartment buildings are analyzed in terms of comparable rents, market conditions and the overall economy. To help you understand your appraisal and its results, consider talking with a commercial real estate broker or multifamily housing professional.

If you think the appraiser overlooked key information, it is worth asking for an exception. But it’s important to do this early in the process, since you will likely need to wait for a new valuation. Be prepared to explain why you believe the property is worth more or less than the current appraisal. This can expedite the approval process. It can also be useful in negotiating with the lender.

2. Market Rents

In the multifamily space, cap rates have been expanding as new loan programs offer access to captive equity for credit-challenged investors. Rental Home Financing, for instance, offers an apartment building loan program that enables even credit challenged investors to leverage their multifamily investment property assets.

One of the most important factors in evaluating an apartment building is calculating its current rents and potential future rents. This is done by preparing a rent roll that details the rents in each unit, number of beds and bathrooms and includes the lease terms. This will also include expenses and provide a calculation of gross potential income.

Another factor in determining an apartment’s potential is the current market and location. If the multifamily market is hot, buyers will likely be willing to pay a higher multiple of income. This will increase an investor’s return. In addition, if the property is in a desirable neighborhood, owners can easily increase rents to keep up with the market. However, if the market is weaker, it may be more difficult to raise rents.

3. Credit Score

Generally speaking, a landlord will look at your credit score before approving you for an apartment rental. However, that doesn’t necessarily mean that a low credit score will automatically disqualify you for an apartment. What’s more important is what’s causing your low credit, such as delinquencies and other collections that can remain on your report for seven to 10 years.

In addition to your credit score, landlords will also want to see the types of credits you have (e.g. credit cards, retail accounts, installment loans, finance company accounts and mortgage loans). The length of your credit history is important as well.

Typically, large commercial banks aren’t as familiar with apartment building financing and will often have a tougher time meeting the lending standards for these properties. For that reason, it may be best to find a smaller bank or mortgage lender. In addition, there are government programs available to help with apartment building purchases, such as the “blanket” loan, which is basically a nonconforming mortgage that’s used to buy multifamily properties with five or more units.

4. Property Condition

Lenders will want to see the property in good condition. Conventional lenders generally won’t want a loan on a property that needs a lot of rehab work or would need more than $6,000 per unit in renovation costs. There are bridge loans that will finance properties in need of a lot of repairs but they can be difficult to obtain and typically require the borrower to have previous experience in rehabbing. In addition, many cities and counties have housing preservation departments (HPD) that perform inspections to ensure apartments are in good condition. These inspections check for things like smoke and CO2 detectors, proper ventilation and cleanliness. If any violations are found, they can have legal and insurance ramifications as well as be a safety hazard for tenants.

5. Lender Requirements

In addition to the property’s income and value, lenders will also look at your financial strength. They’ll require a large down payment and credit score for the loan to be approved, though these requirements will vary by lender. You can compare mortgage rates and terms on Nav’s marketplace.

National banks tend not to be familiar with apartment financing, so it’s best to seek out a local bank or mortgage lender for the most expertise. These lenders can often offer more flexible financing options for apartment buildings, particularly in larger cities. They can offer standardized apartment loans that they’ll package and sell to Fannie Mae or Freddie Mac, as well as customized types known as portfolio loans that they keep on their own balance sheet.

These customized apartment loans can be as low as $750,000. They are nonrecourse and typically require a minimum of 20% down. They may also require that you buy the building through a limited liability corporation or LLC, which limits your personal liability and protects the investment from a bankruptcy of your other properties.