Financing an apartment building investment takes time and effort. It can be difficult to get approval, so be prepared for a long and, at times, difficult process.
Financing apartment building investment typically require large down payments so that rules out most buyers unless they are already invested in real estate.
When you are purchasing an apartment building, you need for the rental income to cover the mortgage repayments as well as other operating costs such as maintenance, ongoing work contracts or advertising. In bank terminology, this is referred to as the Debt Service Coverage Ratio, or DSCR. You can figure the DSCR of a property by dividing the Net Operating Income by the amount of mortgage paid over a year, or the debt service.
Financing apartment building investments require two main things. Having the down payment in hand and knowing the DSCR. Although there are exceptions to everything, plan on having a minimum 20% down payment. If a 20% down payment is not feasible, look at investing in small single family homes until you are able to afford the large downpayment required for apartment building loans.
Look for DSCR of 1.2 or more for an apartment building. The rent amount, the occupancy rate, the maintenance costs, management fees, landscaping costs, and money spent advertising will all affect the DSCR score.
A DSCR number of less than one means that the investment would lose you money. DSCR of one means breaking even, while 1.0-1.2 means a small profit. If you find a property that you want between this range, you could always increase your down payment or reduce your offer. Either of these might increase the DSCR above 1.2, but most investors would prefer to find a clear winner.
Working with an established commercial lender when financing apartment building investments will enable you to quickly realize the profit potential of the properties. An experienced commercial lender will also be able to lead you through the process and possible pitfalls better than a residential lender could.
|
|