What financing options do I have for gutting and renting a 6 unit apartment building?

Asked by Brian, King of Prussia, PA Mon Nov 28, 2011

Hello everyone,

I own a couple rental properties and have found that I enjoy taking care of them and have generally had positive experiences with tenants. I am getting married next year and have been looking to purchase an apartment building that we can live in and fix up. An interesting 6 unit apartment building in our ideal location has come on my radar, however, it would almost entirely need to be gutted (2 out of 6 units are currently liveable and are rented). From a commercial financing perspective, what are my options? Am I looking at a fixed or variable interest rate loan? What are my options for financing the gutting and construction activities? What APR range am I looking at?

Thank you in advance for your time

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Dp2, , Virginia
Mon Nov 28, 2011
Rose presented some excellent points. I agree that some commercial lenders would shy away from funding this deal, but I also know others who'd be interested in this deal if you were to acquire it at the right numbers. I also agree that this deal is a better candidate for hard or private money and creative financing. You might also consider equity partnering with another investor on this.
1 vote
, ,
Mon Nov 28, 2011
Hello Brian,
good commercial lender that will finance up to 80% of the FINAL appraised valkue with
a 20 year fixed rate loan or 30 year amortized adjustable. Give me a call if interested.

Best Regards,
Alan Openshaw
Cornerstone Lending
Southampton Pa
267 992 7276
0 votes
Rose Wilkins…, , Edmond, OK
Mon Nov 28, 2011
The rule of thumb in commercial investing is that the property must be 85% occupied and be at least a 10% capitalization rate in order to qualify for bank financing. Since only 2 out of 6 units are occupied, this means you are only sitting at 34% occupancy, which makes this a distressed property in commercial terms.

If you email me, I will send you a cash flow evaluator to analyze a performa you will have to construct. Based on the performa (what the future income / expense will be) you will base your top appraised value.

The formula you will need to use for your offer is:

1) Top appraised value (minus) repairs needed, divided by 2

That formula will be 50% of the AS-IS value.

This is assuming you are using:

A) Hard Money
B) Private Money
C) Cash

Since the seller is distressed, and cannot sell this property to ANYONE but a cash buyer, I would suggest you come up with some owner financing senarios. For instance, if you have the cash and know how to fix the property up, ask the owner to finance you with zero money down.

You can also do a master lease option, where essentially you are leasing the entire 6 unit from the owner with an option to buy it later down the line. You agree to pay the owner more in the future for giving you an option to buy. And you can negotiate in the contract to ask the owner for a construction budget.

Those are just a few ideas. But, once again, this property WILL NOT qualify for traditional commercial financing. This is considered a high risk loan that only a hard money lender or private lender will make.
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