Apartment Cash Flow Components
Of course, rental income is the source of apartment investing gross cash flow. Due diligence by the lender will be examining marketing plans, advertising and how effective they are at reaching the target market and bringing in prospective tenants. Vacancy and credit losses are then compared to market averages. The goal here is to determine if the income side is providing maximum rental revenues, or if improvements could decrease vacancy and credit losses and/or increase rents or occupancy through better marketing or management procedures.
The expense side of the ledger is just as important. Is management efficient? Are vendor costs in line, or could better contracts be negotiated? It's possible that in-house personnel could be replaced with contracted vendors to save money. Every expense line item should be scrutinized to determine if there's an opportunity for improvement.
Ratios Used in Apartment Investing Financing Decisions
While there's a great deal of due diligence involved, the lender will also be doing some quick ratio calculations to determine whether to make a loan and how much the mortgage should be. Taking the links here to the DSCR, Debt Service Coverage Ratio, and the Break-even ratio will give you specifics as to how they're calculated. Using these two ratios, primarily influenced by the cash flow, the lender can get a snapshot of the performance of the apartment property. If the mortgage that's required falls into acceptable ratio guidelines, the deal can probably be done.
More Units in One Place Mean Better Cash Flows
While thousands of investors are building portfolios of single family residential rental properties, others are concentrating their returns in fewer locations with apartment investing. The economy of scale in operating a large number of units at one location reduces costs per unit, which increases cash flow per unit. Since it's that cash flow that's the primary factor in lending decisions, more investors could be involved in apartment investing, and enjoying apartment financing beyond their current expectations.