Apartment & Multifamily Investing and Financing

Dated: August 15 2020

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How apartment investing creates cash flow and that creates mortgages.

Apartment & multifamily investing creates excellent cash flows, as well as benefiting from the normal tax and other real estate investment advantages. Learn in this article series about how economy of scale increases cash flows, how they're improved, and how lenders use ratios to analyze cash flow for mortgage decisions.

Apartments and multi-family investing is a logical next step for single family rental home investors.  Using the 1031 Tax Deferred Exchange, these investors can roll the profits from the sale of single family properties into multi-family investments and postpone capital gains taxation.

Reasons Why Investors Choose Apartment & Multifamily Investing

Real Estate Investor
Real Estate Investor Clients. CanStockPhoto

Tens of thousands of single family residential rental home investors enjoy all of the benefits of this type of real estate investing.  The cash flows coupled with tax advantages and appreciation in value over time are the main components.

But, many of them would probably sell those homes and move to apartment & multifamily investing if they fully understood the advantages of economy of scale.  Apartment financing is also handled differently. Individual investor credit references and assets are often secondary considerations to the actual cash flow the property is expected to yield.  Learn how things work in this series.

Apartment & Multifamily Investing - Vacancy and Credit Losses

A lease sign is posted on one of the towers at the Parkmerced apartment complex May 26, 2010 in San Francisco, California.

While cash flow in apartment & multifamily investing is made up of both income and expense side financial items, vacancy and credit losses impact the income side before there's any opportunity to enhance cash flow through expense items control.  Learn here about vacancy and credit losses from marketing and advertising influences through property management activities to control them.

Even a single month's unanticipated loss in rent can make a significant dent in ROI, Return on Investment.  Learn how to reduce losses due to vacancy and non-payment of rent, or you'll be penalized in your pocketbook.

Cash Flow in Apartment & Multifamily Investing

Real Estate Investing
Real Estate Investing. ©iStockPhoto

Owning a large number of rental units in one location usually generates greater cash flow per unit than an investor will realize through multiple residential single family rental units spread around the area.

The greater the number of units under one roof or in one location, the greater the advantages of economy of scale.  As a single family home investor you can't get the bargaining clout with vendors that a 100 unit apartment owner has to their advantage.  Learn here about economy of scale, and how to use it in several marketing and management activities to cut costs per unit and thus increase cash flow per unit.

Ratios Used for Apartment & Multifamily Investing Financing Decisions

Troubled Mortgage Negotiations
Troubled Mortgage Negotiations. Jim Kimmons

Using the Break-even Ratio and DSCR (Debt Service Coverage Ratio), lenders can take a snapshot of the performance and cash flow of an apartment or multifamily project, and the size of a mortgage that this cash flow can support.

Lenders do not give as much attention to individual owner financial status and assets in multi-family loan consideration.  Learn in this article about the different way in which these two ratios look at the cash flow and project mortgage qualifications.

Lenders and Apartment & Multifamily Financing Decisions

In a falling market, price is the key.
The Different Viewpoints of Buyers and Sellers. (c) Photo: sxc.hu

There's a great deal of due diligence done by both the buyer and the lender in apartment & multifamily investing.  Virtually every marketing, advertising, management and expense line item in the financial statements are analyzed.  Learn here how the lenders look at an apartment or multifamily project in making mortgage decisions.

Use the things you've learned here to decide if you want to move up to larger scale investing.  It's less of a money decision than one of commitment, leverage and risk management.  

See full article here: https://www.thebalancesmb.com/apartment-and-multifamily-investing-and-financing-2867093

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Tammy Broxson

Tammy Broxson is the Broker Owner of Broxson Real Estate Group, a boutique real estate brokerage in Florida. Tammy is also a State of Florida Real Estate Instructor and a mentor to other real estate p....

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