Loans on apartment buildings.
I was wondering if debt to income applies to large apartment building?  For instance, could I put down 250k on a 1 million dollar property and get a loan with only 50k per year in income?
[{"id": "epjvuzn", "text": "A commercial loan is based on the income generated by the property, not necessarily your income. You might run into issues if you don't have prior real estate experience though.", "replies": [{"id": "epjx0e5", "text": "Also, most commercial loans on investment property require a larger down payment. More like 40%.", "replies": [{"id": "epjxb1q", "text": "This is also a consideration. For multifam, banks are generally more lenient and may lend up to 75%, for the right property, guarantor, etc", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "epjwz3p", "text": "long: I just kept typing..\n\nI\u2019ll assume this is a genuinely curious post. Your question is incredibly complicated. I would recommend you seek the guidance of an experienced multi family broker before putting $250k into a property. Or another investor who can help put together a pro for a see if this is a good buy. Multifam in many market is very expensive. Is this a value add property? Meaning the property is well under market rents and you can rehab and increase rents?\n\nI am not an authority, but can offer some general guidance. Multi family, or most any asset class of commercial real estate is going to be based on the performance of the properties cash flow. In the case of multifam this is calculated based on gross rents, less bad debts, less concession, and less all operating expenses. Operating expenses (opex) are generally staffing, taxes, maintenance, and other things that are necessary for the building to operate. \n\nThe remaining cash after all opex is called net operating income, or net income. This number is used by lenders to determine the amount of debt the property can support. Generally, for a smaller property like the one you described, and bank will want to see a 1.25x debt service coverage ratio, so there must be $1.25 in net income for every $1 in debt payments. Banks will also generally require payment reserves and maybe a maintenance reserve depending on your excess cash flow. The property must cash flow in order for a bank to consider lending on the property.\n\nYour personal income will be a secondary or tertiary source of repayment. With a $50k/yr income you likely wouldn\u2019t be able to service even a months worth of payments. Your personal expenses may take all of your income anyways. So, short answer long, the bank will likely not consider your income when analyzing the property. \n\nMore importantly you would need to look into your personal moneys rate of return if you were to dump $250k into a property. You may find after doing the math that your better off not buying the property, or at a much lower price. Also consider, who would manage the property? Will you be doing tenant screenings? Evictions? Taking payments? Did you consider a management fee in your proforma above if outsourcing?\n\nThere are myriad more questions to consider, but hopefully this helps get you started.", "replies": [{"id": "epjxc5z", "text": "So if the numbers work out could someone with 50k in income get a 750k loan on an apartment building?", "replies": [{"id": "epjy5da", "text": "Rule of thumb regarding personal income of the zponzor/guarantor is you must show net worth equal to 100% of the loan and liquidity of 10% of the loan amount.", "replies": [{"id": "epk2xc8", "text": "This makes sense", "replies": [], "depth": 4}], "depth": 3}, {"id": "epjy5g3", "text": "It\u2019s not impossible, but unlikely unless you have a ton of cash and just make a low income. Guarantor strength is also a huge factor, especially if you are new to investment properties.", "replies": [{"id": "epjyh0a", "text": "I have a few condos that I rent out just thinking about getting a multifamily so I would have complete control and not deal with condo boards.", "replies": [{"id": "epk14y3", "text": "Probably not a bad idea. You may need to go to several banks before you get a yes though. If you have a 25% down payment, and let\u2019s say 12 months of P&amp;I reserves, maybe?", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "epk2b0j", "text": "Won't he also have to personally guarantee the loan. Ie, if he pays $1mm, loses all of his tenants, can't pay the loan and is foreclosed with a valuation below the loan balance, they can go after him personally and bankrupt him if necessary?\n\nI feel like I remember this being the ultimate reason so many developers did a swan dive during the last cycle.", "replies": [{"id": "epk3cpz", "text": "Yes, unless you have a huge corporation with tons of assets and revenue(tens of millions), banks will require an unlimited personal guarantee. In OPs case that may not be worth much. Banks have protected themselves by requiring more equity or requiring a higher dscr, which effectively limits the loan to value as well.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}]