Financing 5-10 unit apartment buildings in San Jose

Where the buildings are

San Jose’s older small apartment buildings are concentrated near downtown, in neighborhoods such as Naglee Park, the Rose Garden, Willow Glen, Japantown and around San Jose State. Farther out, there are pockets of 1960s and 1970s buildings along older commercial corridors.

Tech employment supports regional rental demand, but the rent a lender counts is what each lease says. In a market with high values and covered rents, coverage can be tighter than buyers expect.

The Apartment Rent Ordinance and registry

The Apartment Rent Ordinance sets an annual limit on increases for covered units and requires owners to register them with the city. San Jose also has a Tenant Protection Ordinance that limits evictions to listed causes. Covered buildings commonly show a mix of long-term tenants and recently turned units.

Lenders read the registry records next to the rent roll. Make sure they match. A discrepancy is a common reason for underwriting delays.

Tight coverage in a high-value market

In high-price markets, a building’s value can rise faster than its regulated rents. That leaves the coverage ratio tight even when the building is in good shape. Buyers often bring a larger down payment than they planned, or choose a building with more recently turned units.

Run the numbers with your own tax figure after reassessment and a real insurance quote. If coverage only works on a pro forma, assume the loan will be sized smaller.

Building condition

Many San Jose 5-10 unit buildings are wood-frame construction from the 1950s through the 1970s. Insurers ask about roofs, electrical panels and plumbing. Exterior balconies and walkways on buildings with three or more units fall under the statewide inspection requirement. Have the reports ready.

Purchase and refinance notes for San Jose owners

On a purchase, ask the seller for the rent registry printout, the rent roll and every lease, and compare them unit by unit. Ask whether any tenant has filed a petition or complaint with the city. In a building covered by the Apartment Rent Ordinance, these records tell a lender how much the rent roll can change and how quickly.

On a refinance, the numbers depend on how many units have turned over at market rent since you bought. If the building is close to supporting the loan you want, it may be worth waiting for one or two more leases before ordering an appraisal. Keep rent deposits in a single account so collections are easy to document.

Newer buildings are the exception to watch. A small building completed in the last 15 years may be outside both the city ordinance and the state cap for now, which gives an owner more room on rents. Confirm the certificate of occupancy date and the building’s status before you rely on that, because the state exemption rolls off as the building ages.