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.
The large down payments required for financing apartment building investment can prevent beginning investors from being able to purchase an apartment building as an investment property.
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.
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.
If you can afford the down payment, you need to figure out if the DSCR of the apartment building you are thinking about purchasing is at least 1.2 or greater. Anything less than this will result in a denial of a loan.
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.
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