Hello, I'm looking for information on how to "creatively finance" an
apartment complex.  The buildings have 16 units total and the price is
about $800,000.  I have never purchased property before.

I am a college student on a tight budget, however the property
cash-flows nicely and I believe it would be a sound investment with a
good monthly income if I can just get it financed.  How do I approach
a potential lender and say I have no collateral, can I have $800,000
to purchase an apartment complex??  Do I have any options?

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Request for Question Clarification by acorn-ga on 31 May 2003 17:50 PDT

1)  Do you have someone who could co-sign?  
2)  I am assuming you have no down payment...is that correct?
3)  How is your credit rating?  Have you seen a copy of your credit
report/
4)  You say the building cash-flows nicely.  What documentation do you
have for this?  Sellers will often provide a basic summary statement
of income when selling an income-producing building, but you'd need to
know expenses, upcoming expenses, etc.  Also things like lease
turnover...e.g., are the tenants long-term or students who leave for
the summer.

The building itself is your collateral for the loan.  Generally
commercial loans require 20% down.  So the issue is really one of how
to finance that 20%...how to come up with $160,000.

5)  Is the owner willing to carry a second mortgage for the down
payment?
6)  Have you looked into establishing a limited partnership with
people who *do* have the money?

You're probably thinking that the building would pay for itself, as it
should, so how do you convince a bank that they have nothing to lose.

Well, the way a bank (or mortgage company) looks at it is this: 
'right now the building is worth $800,000 and brings in money, but
that's under the current owner.  We have no guarantee, however, that
this new owner would do the same.  A way to protect ourself is to
require lots of money up front which proves the new owner's
seriousness as well as requiring him/her to have an investment in the
building himself, so s/he would be more inclined to take care of it.'

Regardless of whether or not you actually get to buy this particular
complex, you should draw up a detailed, well-thought-out prospectus. 
Not only will you improve your chances of coming up with the money,
but you will better understand what it takes to run a 16 unit
apartment complex...and it requires a great deal...probably much more
than you imagine (this is the voice of experience here :-)

You also might want to consider starting smaller, i.e. finding a
single family home to purchase as a rental property.  They are usually
easier to rent and maintain, and get you started on the path to being
able to make those larger purchases.  A duplex is also a possibility,
with you living in one side and renting the other.

I look forward to your responses, and applaud your initiative.

acorn-ga