Requirements When Financing Apartment Buildings.
Today, more investors are focusing on commercial real estate. Commercial real estate is used for income generation. Because of this, many real estate investors are opting for commercial properties. The different types of commercial real estate include office buildings, retail buildings, restaurants, multifamily buildings, apartments, and hotels. The investors should, however, have a good understanding of commercial real estate investment before making the investment.
Basically, apartments are commercial properties. In this particular article the main focus is financing apartment buildings. Owning an apartment building is a huge investment. In case you want to buy an apartment, you should consider an acquisition loan. Therefore, the investor needs to understand the financing process and the 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. Therefore, investors will be able to access better deals for their projects.
Commercial real estate loans are different from residential loans. 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.
An investor should understand that commercial properties financing will vary from residential financing. Commercial loans are not backed by government agencies such as Fannie Mae and Freddie Mac. 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. Also, an investor can choose from the various commercial loans options available.
2. Understand the loan-to-value ratio.
Lenders often consider the loan-to-value ratio when financing commercial properties. The loan value is measured against property value using LTV. Lenders obtain LTV when they divide loan amount with the purchase price. Lenders approve commercial loans with LTVs that range between 65-80 percent.
3. Debt service coverage ratio.
DSCR is a measure by the lender on the ability of the property to service its debt. The lender compares annual net operating income to mortgage debt service. For proper cash flow, DSCR should be at least 1.25.