What You Need to Know about Financing Apartment Buildings
For many investors, nowadays, they are concentrating on commercial real estate. Commercial real estate is used for income generation. Because of this, many real estate investors are opting for commercial properties. There are various types of commercial properties such as retail buildings, restaurants, hotels, office building, multifamily building or apartments. But before the investor makes a commercial real estate investment, it is essential they have adequate knowledge.
Apartment buildings are part of commercial properties. This article will look into financing apartment buildings. First, owning an apartment building would be a great investment. When purchasing an apartment building, an acquisition loan is worth considering. 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. This will lay a good foundation for your financing. The good thing about an experienced commercial lender or broker is that their network has other trusted lender that include private lenders, banks, and institutional lenders. Because of this, investors will easily find great financing deals for their investments.
Commercial real estate loans are different from residential loans. Therefore, requirements for commercial loans are also different. If the borrower has a better understanding of the financing process, it becomes smooth and easier. Among the things that the investor should understand concerning commercial loans include the following.
1. Different loan options.
The borrower should know that financing commercial properties is different from residential loans. These commercial mortgages are not backed by different government agencies such as Freddie Mac and Fannie Mae. They also charge higher rates compared to home loans. Also, commercial loan terms differ from that of residential properties. For instance, the commercial loans terms will range from 5-20 years while that of residential start can go up to 30 years. There are, however, different commercial loan options for the investor to choose from.
2. Consider 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. Lenders obtain LTV when they divide loan amount with the purchase price. LTVs for commercial loans should be between 65 to 80 percent.
3. Understand the debt service coverage ratio.
Lenders use this metric to measure whether the property will be able to service the debt. In this case, net operating income is usually compared to mortgage debt service. The DSCR should not be less than 1.25 which would indicate proper cash flow.