Apartment Financing Explained
Before you go down to the local bank or investment company, it might be a good idea to ask yourself how long you expect to own the apartment building or complex. Is this a long-term investment? The answer to this question can significantly impact the type apartment financing you should get.
If you are planning on owning the property for a couple of years or less, most experts agree that an adjustable rate mortgage (ARM) will be your best method of apartment financing. Like the name suggests, an ARM is a loan will an interest rate that may change with time in accordance with an index. ARMs will usually offer a better initial interest rate than other loans in order to offset the risk of future interest rate fluctuations. Moreover, the mortgage holder is also protected by a maximum interest rate, or ceiling, that may be reset every year. Individuals planning to stay in the property management business for the long term may want to look into a fixed rate mortgage. A fixed rate loan will guarantee the same interest rate over the life of the mortgage.
If interest rates are historically low at the time you receive the loan, this type of loan will lock you in at the best possible rate. On the other hand, if interest rates are historically high at the time of the loan, you could be stuck paying higher interest than you would have with another method of apartment financing.
Another important question you may want to think about before seeking an apartment financing source is the estimated cost of the property. This may seem like a fairly obvious question to consider when looking for a loan, but far too many first-time investors just take the interest rates they're given without question. If the property you're interested in is selling for over $500,000, a direct lending source or investment company can give you a better interest rate than most banks or credit unions. However, if you're looking at a smaller apartment building selling for under 500k you may want to see what your local bank can offer you.
With both banks and other lending institutions eager to provide apartment financing, new options have emerged in recent years. Generally smaller banks and other lending sources like direct lenders have a greater degree of flexibility in their loan-offering lineup. In an effort to attract more borrowers, many of these lenders are now offering either non-recourse or partial-recourse loans.
The traditional recourse loan offered by most institutions meant that the lender could have claim on the personal or corporate assets in the event of the default of the mortgage holder. A on-recourse loan on the other hand means the lender cannot hold you personally liable if you fail to repay the debt as promised. The only recourse of the lender is to take the property you've pledged as security for your loan, but he cannot claim any other assets or money from you if you default.
If you plan to build the apartment building instead of buying it, some lenders may offer you a partial recourse construction loan. This means that until work is finished on the project, the borrower is responsible for the entire amount of the construction loan. However, as soon as the project is ready for occupancy and the apartment building has some value for the lender to seize, the borrower is responsible for only 50% or less of the value of the construction loan in the event of a default.
Whatever method you choose to provide apartment financing, it is important to make sure you understand all the details. Choose a lender that has both the experience and desire to sit down with you and take the time to answer your questions clearly. The right lender will go a long way in helping you find success in the exciting world of property investing and management.
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