Oftentimes, people get the order of importance wrong when it comes to investing in multifamily real estate. Learning how to finance apartments needs to be at the top of your list.
Unfortunately, like most things in my life, this is something that I had to learn the hard way.
I wrote this article so you don’t have to learn this crucial skill through trial and error.
These are the basics of financing apartments the smart way.
Make debt your #1 partner
The first mistake I notice new real estate investors making is asking the wrong question.
New investors will ask how to raise money for a deal. What they really need to figure out is how to get financing on a deal.
The only reason you would not want to get financing is that you are thinking too small. Don’t make that mistake either.
Know this — if you have a big enough down payment, you will get approved. It doesn’t matter how bad your credit is.
That means you want to aim for 60-75% in debt leverage. Banks favor financing that kind of apartment deal.
Another term to know when learning how to finance apartments is the debt coverage ratio (DCR). This is the ratio at which your net operating income (NOI) covers the rate you borrowed your money at.
Ideally, your NOI will cover your debt and then some, giving you cash flow. So, what you want to look for is what’s called a “120 spread.” A 120 spread has your debt on the deal completely covered. Then, you make 20% on top of that.
This is the way you get your property to make money for you and pay down the debt at the same time.
Understanding how to finance apartments is the key to playing this real estate game the right way.
You don’t need to have a ton of cash to get in the game. You just have to know how to secure that financing.