Financing Apartment Building Investment
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.
One thing you’ll need to know for financing apartment building investment is a DSCR score of 1.2 or greater. A DSCR score is the Debt Service Coverage Ratio. This is the number that you get when you divide the net operating income by the debt service, which is the yearly mortgage amount. This ensures that not only will you be able to repay your debt obligation to the bank and the operating expenses such as maintenance you’ll also make a monthly profit on your investment. This number is useful to the bank when qualifying a loan and useful to you when evaluating properties.
Along with determining if the DSCR will be acceptable, expect to pay between 20-30% of the acquisition cost as a down payment. If you cannot afford the down payment of an apartment building, considering growing your wealth with single family homes and return to apartment building investment when you have more money.
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.
