First, let’s take a quick look at where the Multi-Family market is expected to head in 2016. According to Steve Guggenmos, Freddie Mac Multi-family Vice President of research and modeling: Multi-family “…started 2016 with good momentum on the heels of a strong year. This year more multifamily supply will enter the market at a pace not seen since the 1980’s. We expect the multifamily sector to continue to grow at a robust level, with the national vacancy rate staying below the historical average throughout 2016, and ending the year under 5%. As a result, rent growth will remain strong as new supply continues to be met with significant demand.”
Where is that demand? The Top 10 metro markets, according to Freddie Mac, that will see gross income growth (which is the average rent adjusted for vacancy factor) are all on the West Coast with the exception of New York and Chicago.
Austin, TX and Denver, CO are expected to see demand outpace supply in 2016. There is a concern however, because low oil prices in these areas could see a slowdown in employment growth.
Here are a few markets that aren’t seeing positive trends: Washington DC, Boston, MA, Jacksonville, FL, and Norfolk, VA will see vacancy rates above their historical average.
We’ve given you a brief update on the market as a whole, so what is next? Finding a property to purchase and getting a loan. Commercial lending has what is commonly known as the five C’s – Capacity, Capital, Character, Collateral and Conditions as lending criteria. Being aware of these criteria and financial stable in these areas will increase your chances of getting a loan.
Capacity – It’s the borrower’s ability to pay the debt. The borrower must be able to generate enough cash to make the mortgage payments. The lender will analyze all the income related to the building and compute the NOI (net operating income) and the DSCR (Debt Service Coverage Ratio). Lenders will usually expect to see a DSCR of at least 1.2.
Capital – This is the borrower’s net worth and liquidity. The minimum that a lender will look for is enough capital so the borrower can put 20% down and has additional cash reserves.
Character – This has to do with the borrower’s credit history and their credit character. Do they pay their bills….etc? Lenders expect to see a credit score of 680 at a minimum. If there are negative issues on a borrower’s credit report, there may be an opportunity for those to be explained.
Collateral – This is related to the property itself. Lenders will want to see a property in good condition. The lender will also require an appraisal and will typically lend up to 80% of the purchase price on a property that is qualified.
Conditions – There are a couple of things covered here. The lender will look closely at the condition and neighborhood of the property. They will also look at the trends of the market. For example, are rents increasing or decreasing, are jobs on the rise….etc. Once this is done the lender will offer terms of the loan to the borrower for their approval. The lender might also require a personal guarantee from the borrower.
So, if you are looking to purchase an apartment building, you now have a better idea of the general market and what you will need from a lender’s perspective.
Diana Hill – email@example.com