November 19, 2008
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.
A large down payment is one of the things necessary for securing a loan to finance apartment building investment. Of course, this expense means that not everyone can qualify for a loan.
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 score of under one means that you would be losing money, and of course these properties should be avoided. Occasionally, investors will set their hearts on properties with DSCRs ranging between 1 and 1.2. It is best to not get caught up in emotions while investing, but it may be possible to invest in these properties. You’ll need to either increase your down payment amount or negotiate a lower offer.
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.
Filed under financing apartment building investment, financing investment properties by realinvesting
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