One misconception that keeps many real estate investors out of the apartment & multifamily property investment markets is that they don’t have the assets or credit worthiness to borrow in this market. True, the amounts of money are larger, and loan amounts and payments are higher as a consequence. But, the criteria lenders use for these types of loans is different.

“Cash flow is king” is a popular saying, and it’s actually quite true in the apartment & multifamily investment lending environment. Borrower credit history, and value of property structures and land take a back seat to cash flow. If the cash flow supports a loan, with enough cash flow to make payments with profits left over, loans can be had.

Cash Flow For Apartment & Multifamily Properties

As the words imply, “cash flow” is going to be the money stream flowing in or out in the operation of an apartment or multifamily investment. As it is cash, all operating expenses should be subtracted from rent income, yielding the net operating income. Once this monthly positive cash flow is calculated, there is a way to determine the approximate amount a lender will loan against the apartment or multifamily apartment.

DSCR – Debt Service Coverage Ratio

Lenders take the net income, or cash flow from operations, and a ratio is calculated to determine the amount of money that can safely be loaned against the apartment & multifamily property. This DSCR is a multiplier indicating the ratio of the loan balance to the cash flow. An example would be an apartment or multifamily investment property that cash flows $45,000 per month, or $540,000 per year. Many lenders want to see the cash flow at 1.25 times the cash flow. In this example, the lender would not want to loan more than $432,000 against the property, as $540,000 is 1.25 times that loan amount.

Anything less than the 1.25 amount would be considered too risky by this lender, as vacancies or other problems could result in a troubled loan. A higher DSCR, such as 1.33 would look better, as the cash flow provides a third more cash each month than the payment. Lower, say 1.15, would not be as good, as the cash flow is only providing a 15% cushion over the loan payment.

Apartment & multifamily investment can be the goal of many more real estate investors once the mechanics of cash flow, DSCR, and lending decisions are understood.

I’ll share more with you soon…

Warm Regards,

Karen Hanover, CCIM Candidate
Apartment Education Institute, President

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