What You Need to Know about Financing Apartment Buildings
Today, more investors are focusing on commercial real estate. Commercial real estate is used for income generation. This has made more investors to choose commercial properties. The various commercial properties are such as multifamily buildings, hotels, apartments, restaurants, office buildings, and retail buildings. It is, however, important for the investor to possess adequate knowledge on commercial properties before making such investments.
Apartment buildings are part of commercial properties. In this article, however, the focus will be on financing apartment investments. Owning an apartment building is a huge investment. If you want to purchase an apartment building, you would look for an acquisition loan. It is, therefore, important for the investor to possess sufficient information regarding financing requirements. But since apartment buildings are commercial properties, financing apartment buildings requirements are the ones for commercial loans.
It is, however, important for the borrower to work with a reliable commercial broker or lender such as Assets America. A respected lender will be the best thing in financing a commercial property. Also, an experienced commercial broker has a network of trusted lender such as banks, institutional lenders, alternative funding sources, and private lenders. Because of this, investors will easily find great financing deals for their investments.
There is a big difference between commercial mortgages and residential mortgages. Because of this, requirements for financing commercial properties is also different. When the investor possess a good understanding of financing commercial property, the process becomes easier and less intimidating. Among the things that the investor should understand concerning commercial loans include the following.
1. Mortgage options.
First, the investor needs to understand that commercial loans are different from residential mortgages. Again, commercial loans do not get backing from various government agencies like Freddie Mac and Fannie Mae. Compared to home loans, their commercial loans interest rates is usually higher. Loan term for commercial loans will also vary from home loans. For instance, the commercial loans terms will range from 5-20 years while that of residential start can go up to 30 years. Also, an investor can choose from the various commercial loans options available.
2. Understand the loan-to-value ratio.
The loan-to-value ratio is one of the metrics lenders often consider. LTV measures the value of the loan against the value of the property. LTV is calculated by dividing loan amount by purchase price. Lenders approve commercial loans with LTVs that range between 65-80 percent.
3. Debt service coverage ratio.
Lenders use this metric to measure whether the property will be able to service the debt. The lender compares annual net operating income to mortgage debt service. The DSCR should not be less than 1.25 which would indicate proper cash flow.