Financing apartment building investments can be tricky and take both time and effort. A beginner can often overlook important steps. Because of this, it is best to work with a commercial lender with experience in financing apartment building investments.
Financing apartment building investment typically require large down payments so that rules out most buyers unless they are already invested in real estate.
The rental income of the apartment building that you purchase needs to cover not only the repayment of the mortgage, but also any costs such as advertising or maintenance. This is known as the DSCR, or the Debt Service Coverage Ratio. The DSCR can be calculated by dividing the net operating income by the yearly mortgage payments, also known as 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.
Find an apartment building with a DSCR greater than 1. To be approved for a bank loan, you should strive to find a Debt Service Coverage Ratio of 1.2 or greater. If the DSCR is less than one, you would be losing money buy investing in the property. This is a clear sign that you should move on.
If the DSCR number is between 1.0-1.2, you would be either breaking even or doing slightly better. This is not good enough for you as an investor or the bank as a loan giver, but these buildings still have potential. If the properties have everything else that you desire, consider making a lower offer or increasing your down payment to increase the DSCR over 1.2.
Financing an apartment building investment can be tricky but the right lender will guide you through what you need to know and help you purchase the most profitable properties.