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Ratios for Apartment & Multifamily Lending Decisions Real estate investors experienced in the purchase and renting of single family rental properties are quite familiar with lenders who look at credit scores, proof of income, and also the possible cash flow from the investment. But, many don't realize that a mortgage for apartment & multifamily properties can actually be easier to get. That's because the decision of whether to loan and how much to loan is made mostly on the cash flow of the property. With cash flow being the major factor in the lending decision, there are a couple of simple ratios that a buyer can use to help them to view a potential apartment or multifamily property purchase in the same way a lender would view its value. These ratios attempt to assess the value and the risk in a mortgage based on the cash flow generated by the property. Here are the basics of these two ratios: Break-even Ratio for Apartment & Multifamily Mortgage Decisions Every successful business person is keenly aware of their break-even point, the point where income exceeds expenses, and the business becomes profitable. It's called “Black Friday� in retail, the Friday after Thanksgiving, when many retail businesses reach a critical point of higher sales than expenses for the year. It's the same for apartment & multifamily investment, and lenders want to see a break-even point that's reasonable before a mortgage will be originated. What point is that? A commonly-used number is 80%. Basically, the cash flow after expenses of operation and the payment of the mortgage payments should be no more than 80% of the income generated from rents. So, if the project costs $40,000/year to operate, and the mortgage payments are $40,000/year, the cash going out is $80,000. To achieve an 80% break-even, the property would have to generate $100,000 in gross rental income. $80,000 / $100,000 = 0.80, or 80% for a Break-even Ratio DSCR, or Debt Service Coverage Ratio Though this ratio looks at roughly the same components of ownership, income and costs of operation and debt, it's expressed a bit differently. The lender wants the gross rental income to exceed a certain base multiplier of the monthly mortgage payment. Though this varies, few lenders will consider a loan if the DSCR is lower than 1.25. How does that look? If a project can be purchased with a $10,000/month gross operating income from rents, then the lender with a minimum requirement of 1.25 for a DSCR would not make a loan with a payment greater than $8000/month. $10,000 / $8000 = 1.25 The lender wants at least 125% more income than the mortgage payment. When considering apartment & multifamily properties for purchase, knowing how the lenders value them is a tool for the buyer. Ratios for Apartment & Multifamily Lending Decisions, Copyright 2010 by

Ratios for Apartment & Multifamily Lending Decisions