It’s easier than you might think to acquire an apartment building. You can fix and flip it, or keep it and enjoy long-term rental income. Here are five tips to help you with your acquisition.
Tip 1: Calculate the Income Potential
Begin by examining the building’s current rent roll. It lists all tenants, their monthly rent amounts and when their leases expire. From this, you can figure out your monthly and annual gross income. You’ll also know the number of vacant units, which establishes a ceiling on income potential. Combine this information with the current income statements to find the net operating income (NOI, which is income minus expenses). Knowing NOI allows you to formulate how much to pay for the property, which is the annual NOI divided by the required rate of return, known as the cap rate.
Tip 2: Use a Private Lender/Loan Broker
To make your purchase, you want the best financing possible, which means an affordable interest rate and a quick approval. Using banks is a tough slog, since you require a really good credit rating and a lot of patience. A much better alternative is to use a private lender, who works with a network of loan brokers. Competition within the network assures you will get the best deal possible. Your credit score is not that important, because the loan is based on the value of the property after rehab. If you live in the Greater Washington D.C. region, Specialty Lending Group is your go-to lender for unbeatable deals and knowledgeable service.
Tip 3: Forget About Government-Backed Loans
If you think bank loans are slow, imagine how much longer it takes for you to receive one backed by a government guarantee. Loan amounts might be capped below your requirements, and funding time can extend to half a year. That’s a long time for something to go wrong. You also must satisfy a large number of criteria to qualify for the loan.
Tip 4: Understand Recourse Loans
A recourse loan is one in which you pledge your personal assets as additional collateral for the loan, above and beyond the apartment building itself. These are often required by lenders as protection against default. We always endeavor to offer you non-recourse loans, in which your personal property is safe.
Tip 5: Use Interest-Only Loans for Fix-and-Flip
An interest-only loan will reduce your debt service outflows as you rehab the property. Once you sell the building, you pay off the loan with a balloon payment. If you decide to keep the building, you can refinance with a mini-perm or take-out loan.