Offer accepted on 16 units, now what to do for financing?

[Jim Wilder]

I'm a true newbie and just had my first offer accepted on a 16 unit apartment complex. It was listed for $723K and offer was accepted for $675K. So... how does the financing work? Is it based on projected income of property? I'm looking to let the property pay for itself and want to use a minimum down payment. All the units are full and it has a property manager with a waiting list for more wanting to rent. Property is located in Waynesboro, VA.

[Michael Core]

Based on your questions, it sounds like you need to do some quick analysis ASAP so that you can have an intelligent conversation with the bank. 

Most banks will be looking at the net income of the property and the debt service coverage ratio (DSCR). This is how many times the net income of the property will cover the loan payments. Many banks are going to want a minimum of 1.25, meaning the annual net income divided by the annual mortgage payment should be 1.25 or more. I would estimate the mortgage payment by running scenarios of how much the payments would be at 20 or 30% down (typical required deposits) and using whatever the interest rates are for those types of properties in your area (ask a mortgage broker).

Make sure when you calculate the net income, you account for some vacancy (the property manager should know what the rate is for your area) despite the fact that the property is currently at full occupancy. Also account for normal operating expenses, estimated property taxes (as these will probably be higher than what the previous owner was paying, due to the sale) and reserves for ongoing repairs as the bank will be considering these factors also.

Hope this helps and best of luck with your deal!