Why is Experience Required for an Apartment Loan?

Published January 21, 2012

Yes, they do call investing in an apartment complex a passive investment, inferring that all you have to do is wait for the tenants to pay the rents while you sip your pina colada in the shade. In reality, owning an apartment building successfully and owning a passive investment have very little in common. Officers processing multifamily loans know that the number one reason why business fails is because of poor management. They also know that the number one reason why apartment loans fail is because of poor management. In other words owning an apartment complex of five units or more takes the same skills as running a business.

To obtain apartment financing today, lenders do require you to have experience. They prefer that you own at least one multifamily property of five units or more for a minimum of 2 years. Owning more than one property is even better. Just like businesses, apartment complexes fail for similar reasons. Some of these are: not having the best product – keeping amenities of the units like floor coverings, fixtures and appliances in poor condition — having undesirable tenants, having customers that don’t pay, and not managing income and expenses responsibly.

You might be thinking that all you need to do to remedy this is to hire a professional property management company and then it truly will be a passive investment. Apartment lenders see just as many apartment complexes fail with professional management as those that are managed by the owners themselves. Apartment loan officers want experienced borrowers who have learned that they have to be involved in the running of the property and are willing to manage their professional property managers. Multifamily experience is a key factor in the quest for multifamily loans.

By Terry Painter/President