6 Unit Apartment Financing

Asked by Brian, 19406 Sun Oct 23, 2011

My fiance and I are looking to purchase our first home together. I currently own a duplex that I am renting out (bought 3 months ago). We will be getting married next November. I have found a 6 unit apartment complex that looks like it could potentially be a good buy for us to live in while renting out the other units (doing my due dilligence). My question is how financing will work for the purchase. Purchase price is approximately 340k and I have 10% down available. Will this be a commercial mortgage? If so, what requirements may I need to meet in terms of DTI, downpayment, ROI, etc.? Also, will the rental income from the duplex factor into the DTI given that the property was only purchased three months ago? Gross income is 80K without the rental and 85K with the rental.

Thank you

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Dp2, , Virginia
Mon Oct 24, 2011
Most commercial lenders will only lend up to 75% to 80% LTV. Yet, some might be flexible on how you'd come up with that remaining 20% to 25%. Even if you only have 10% to put down, then you might have some other options.

Commercial lenders will qualify the property first, and you next. The NOI, DCR (aka DSCR), and ROI are the most important numbers (in that order). Keep in mind that you'd also need to factor in any deferred maintenance, that you'd need to handle immediately, into your calculations.

Make sure to base your purchase decision on the actual--not proforma--numbers.
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, ,
Mon Oct 24, 2011
Yup, 5+ units for residential would be a commercial mortgage and typically 25% down is the requirement. There is something called the debt service coverage ratio (DSCR), which is kind of the commercial version of a DTI. DSCR is the net operating income divided by the total debt service, and the ratio needs to be no lower than 1.25. A ratio of 1.00 would mean you are breaking even, less than 1.00 would be a negative cash flow. Google "dscr" for a variety of websites that discuss the intricacies of calculating it. There is a personal debt to income ratio that also needs to be met (similar to residential, although higher can qualify if the property cash flows well), and rental income from the duplex is possible to qualify with you being able to document the lease & receipt of rental income. But with just 10% down that is going to be tough IMO.
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