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Financing Apartment Building Investment Are Difficult Process? |
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Written by Andy Austim
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Wednesday, 26 November 2008 08:12 |
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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.
by AndyAustim
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.
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.
The DSCR, along with the down payment amount, are the two things that will determine if you are approved for financing of an apartment building investment. The down payment needs to be at least 20%, but 30% may be required. If you cannot afford this amount, forget about investing in apartment buildings for now. Instead, focus on investing in single family homes until you can afford to purchase an apartment building.
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.
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.
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