Part 1: Multifamily Investing: Purchasing Part 2 below discusses Financing Phoenix apartments. Financing: Usually a residential loan is sufficient for buildings with one to four units, while a commercial loan is necessary for buildings with five+ units. Residential financing has less stringent guidelines and is based more on borrowers financial status while commercial financing puts more of the burden of the performance of the property. Typical financing for one to four units will require 20-30 percent cash down but 10% may be possible as well, fees vary, but usually average around 2-4% percent of the purchase price.
To add larger investment properties to your real estate portfolio you need to apply for a commercial loan, which has different underwriting and approval processes. Commercial loan lenders are much more interested in profit and loss histories for the project itself. That can make convincing your bank to give you the money based on forward-looking projections more difficult, but its often easier to get a larger loan then a smaller one. If possible, you should provide at least a 2-5 year historical report of income and expense data with your application package. Get this from the seller and compare it against current market conditions. Commercial loan lenders prefer to do larger loans so it may be difficult to find financing for smaller amounts. That means you’ll either have to think bigger and spend more upfront or shop around until you find a bank willing to finance smaller deals. Some local banks will do smaller loans. Lenders tend to look at all cash flow including the amount of money you have in reserve. Lenders will also look at other costs you’ll incur besides the mortgage; including taxes, regular maintenance,management fees, vacancy rates, and deferred maintenance. Banks need to see an ability to make repayments. Most lenders will have a set income to debt ratio, called debt service coverage ratio. A DSCR of 1.0 means for ever dollar of income there is a dollar of debt repayment. Expect most lending institutions to require a DSCR of at least 1.25 before they consider a loan viable. Let us know if you have specific questions about investing in apartment buildings. Part 3 is about the good part; Cash Flow.
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