How do I finance a value-add apartment building?
A value-add apartment building is usually financed with a bridge loan of 65 to 75 percent of total cost, including renovation, at 8 to 12 percent interest-only for 12 to 36 months with an interest reserve, then refinanced into an agency or bank loan once occupancy reaches 90 percent and coverage reaches 1.25. Lenders underwrite the business plan: current income, the renovation budget, projected rents supported by comparable leases, and your team.
The structure
| Phase | Loan | Typical terms |
|---|---|---|
| Acquisition and renovation | Bridge loan | 65 to 75 percent of cost including capex, 8 to 12 percent interest-only, 12 to 36 months, interest reserve, capex holdback released in draws |
| Stabilization | Same loan, lease-up period | Occupancy rising to 90 percent, rents to market |
| Permanent | Agency or bank refinance | 75 to 80 percent of the new value, 1.25 coverage, fixed rate |
Ranges vary by lender.
What the bridge lender underwrites
Current income. The going-in coverage may be below 1.00; the lender wants the interest reserve to carry the gap.
The plan. Unit-by-unit renovation scope, cost per unit, timeline, and the rent premium each renovated unit is expected to earn, supported by comparable renovated leases nearby.
Exit. The stabilized NOI at market rents must support a permanent loan large enough to pay off the bridge. Lenders run that refinance test at a rate above today's.
Team. A property manager and contractor with value-add experience if you lack it.
Liquidity. Reserves beyond the interest reserve, often 5 to 10 percent of the loan.
A worked example
Twenty-unit building, purchase $2.4 million, renovation $400,000, total cost $2.8 million. Bridge loan at 70 percent of cost: $1.96 million, with the $400,000 capex held back for draws. Current NOI $130,000; at 10 percent interest the annual interest is $196,000, so the interest reserve covers the shortfall. After renovation, rents rise $250 per unit per month, NOI reaches $200,000, and the building appraises at $3.3 million at a 6 percent cap rate. An agency refinance at 75 percent, $2.475 million, pays off the bridge and returns equity, with coverage near 1.30.
Where the plan breaks
- Renovation costs run over and the capex holdback is short.
- Rent premiums come in below projection.
- Lease-up takes longer and the interest reserve runs out.
- Rates rise and the refinance coverage test fails.
- Taxes reassess higher than modeled.
Building a resilient plan
- Underwrite the rent premium at 80 percent of the comps.
- Add a 10 percent contingency to capex and three months to the timeline.
- Size the interest reserve to the full plan plus a cushion.
- Run the refinance at a rate a half point above today's.
- Take a bridge term with an extension option.
How CommFi handles it
Our lending desk underwrites the plan the way a bridge lender will and prices the permanent refinance at the same time, so the exit is tested before you close. It funds direct when it fits, and when a value-add specialist is the better match, the desk searches a database of 7,000+ lenders and the ones that lend on multifamily business plans compete for it. Zero upfront fees.
Related reading
Related questions
- How do you finance a value-add apartment building?
- With a bridge loan sized on total cost including renovation, carried by an interest reserve, then refinanced into agency or bank debt at stabilization.
- How much can I borrow on a value-add multifamily deal?
- Typically 65 to 75 percent of total cost, including the renovation budget, from a bridge lender.
- What do bridge lenders want to see on a value-add plan?
- Current income, a unit-by-unit renovation budget, projected rents supported by renovated comps, an exit that pays off the loan, and an experienced team.
- When can I refinance a value-add building into an agency loan?
- Once occupancy is around 90 percent for 90 days and coverage reaches 1.20 to 1.25 on actual income.
- What is the biggest risk on a value-add multifamily deal?
- Rents or timeline missing the projection while the interest reserve runs out, which is why the plan should be underwritten with cushions on both.
Property developer and licensed appraiser. 22+ years in real estate: TIC conversions, multi-unit redevelopments, mixed-use, fix and flips, commercial DSCR.