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.
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.
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.
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.
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.