5 Things to Know About Financing Your Apartment Deal

It's tough to get financing for all those houses you want to buy and there is a good reason for that. Traditionally, if you wanted to own multiple units of rental properties, it made no economic sense to own more than two or three houses.

In most markets a detached home costs about 25% more than an attached home but the rents that one could receive from an investment with equal bedrooms and baths was only about a 10% more. The banks realize that investors with a strategy to rent many housing units are leaving a a lot of money on the table.

The banks force investors to move on to bigger and better things when they limit the number of residential loans an investor can have. The bigger and better thing they want you to pursue is multiple housing units under one roof, Apartment Buildings!

There are 5 very basic and important things you need to know about financing your apartment deals. Knowing these things before you begin your transition from residential to commercial financing can be the difference between a successful deal and one that will never make it!

1. Don't start to big! Commercial banks qualify you on credit worthiness, not just credit score. Credit worthiness means someone with a lower score may get financing than someone with a higher score because they have experience. If you've never had more than $500,00 in mortgages you won't be approved for a $2,000,000 loan.

2. Experience is the key. Never make an offer for a property that is larger than your experience. For instance, if all you've ever owned is two rental houses and a duplex (essentially 4 doors) don't try to buy a 50 unit complex (50 doors). Start smaller, say an 8-12 unit building.

3. You WILL need money. While there are some strategies that involve no-money down type scenarios, they are hard to come by. You'll need about 20%. Five percent for out of pocket expenses and due diligence and 15% for the down payment. (We'll talk about no-money down strategies in another blog, for standard loans you or you're partners will need a 15% down payment)

4. Personal positive cash flow is a must. The lenders will look at the cash flow of the deal, but they'll look at yours as well. If they throw your finances in with the properties ability to generate cash and the total DSCR (Debt Service Coverage Ratio) is less than 1.10, you will have a problem getting the approval.

5. Partners are important to... Make sure that you have a rock solid agreement and if the partner is the 'money' guy, make sure their money is seasoned for at least 90 days!

You may hear a different story about loans and approvals from the ones I've stated above but consider the sources you get your info from. What is their motivation, did you buy books and CD's from them, are they really lenders and if so, how long have they been in the lending biz.

The truth is that the economy has changed and the markets have changed and all of the lender rules have changed! Change has come to America and where commercial investment loans are concerned that change is not to the borrower's benefit.

Knowledge is power and if you arm yourself with the proper knowledge you can create the partnerships and negotiate the deals that will be successful for you.

Michael Gross is the author of this blog and President of Dividend America Mortgage. He has been a Realtor, a Builder, an Appraiser and is an active investor. With over 24 years of real estate and lending experience he uses if knowledge to help real estate investors create successful financing strategies. Contact him at 770-350-7373 or mgross@dividendamerica.com.