Buy an Apartment Building — How to Buy an Apartment Building with Intelligence

DSCR and Apartment Building Investments - What is Debt
Service Coverage Ratio?

As a commercial finance consultant I speak with new apartment
building investors on a daily basis whom respond to one of my
flyers or visit my website. Typically, here is how the
conversation unfolds:

Investor: Hello Ted, my name is “first time apartment building
investor” and I am calling because I was visiting your website and
was interested in the loan program you are offering for
multi-family properties.

Me: Great, tell me about the apartment building you are purchasing.

Investor: Well, I found this great 38 unit apartment building in
Austin, Texas. My realtor told me that the gross income from the
property is around $500,000.00 and the taxes are about $15,000.00.
The asking price is $5,000,000.00. I am willing to put down 20% of
my own money and I need a loan right away because the realtor said
there are other serious buyers looking at the property. What do I
need to get a loan on this building?

Me: Have you figured out what the DSCR for the property?

Investor: The what?

Me. The Debt Service Coverage Ratio is the number that banks look
at to determine if the apartment building will pay for the
property’s annual expenses and mortgage payments. DSCR is figured
by dividing the (NOI) by the annual debt service of the property.

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This is where I gently advise my potential client to perform more
due diligence on the property by obtaining the income and expenses
on the property for the past few years so that we can determine
exactly what the net operating income is.

Here is how the property financials break down:

Gross Rents $500,000

Annual Gross Revenue $500,000

Minus 5% Vacancy Rate $25,000

Actual Gross Income $475,000

Real Estate Taxes $7,500

Insurance $2,500

Maintenance $2,500

Exterminator Service $2,500

Up Keep $2,500

Utilities $2,500

Off Site Management Fee 5% $25,000

Replacement Reserves

$200 Per Unit X 38 Units $7,500

Total Expenses For Operation $52,500

(NOI) Net Operating Income $422,500.00

The net income on this property includes all of the property
expenses except for the monthly debt payments or “debt
service”. The “debt service” is simply the principal and interest
payment on the mortgage paid over a one year period of time.

Loan Amount: $4,000,000

Interest Rate: 7%

30 Year Term

Debt Service = $319,345.20

To figure out the DSCR, divide the NOI ($422,500.00) by the Debt
Service ($319,345.20).

NOI $422,500.00/ Debt Service $319,345.20 = DSCR of 1.32

With a 20% buyer down payment this building has a DSCR of 1.32.
This basically means that the building’s income will cover all of
annual expenses including the loan payments while still showing a
profit. Banks
are eager to lend money on a property like this. A DSCR number of
1.0 would indicate that the building is breaking even and a DSCR
lower than 1.0 means that the building is losing money. Commercial
lenders require that an apartment building have a DSCR of 1.2 or
higher.

Armed with this information, the diligent investor is one step
ahead of the herd. Preparing an accurate loan package is an
essential ingredient to your success as an apartment building
investor and calculating the DSCR early on in the process will save
you a lot of time and headaches.

Order the full course here at
“Buy Your First Apartment Building E-Course”

The Zen monks in Japan have a saying: “if you see the Bhuda in the
road, kill him.” There are a lot of so called “Gurus” or self
proclaimed real estate “Bhudas” in the real estate investment
education business . You have seen their late night infomercials.
These “Gurus” offer you outrageous promises of how easy it is to
get into this business. I am not one of those real estate
celebrities. I am just a normal guy. I don’t drive a Ferrari or
take a helicopter to my Manhattan roof top office to meet with
Donald Trump. And, if I ever become that successful in this
business I probably won’t have time to write these courses anymore.

While designing my course, which is an ongoing education for me
also, I have researched all of the available information about
purchasing, managing, financing and selling apartment buildings.
I also have relied upon my years of experience buying and selling
commercial real estate of all kinds. I have put everything I
learned in an easy to understand course.

Check out what you receive and learn with the full course here:

“Buy Your First Apartment Building E-Course”

My goal is simple. I want to provide you, the beginning apartment
building investor with all of the tools and all of the knowledge
you will need to begin investing in apartment buildings.

I’m not like those other guys. I drive a Pontiac not a Ferarri,. I
don’t have glossy brochures or fancy shmancy websites. What does
any of that have to do with serious real estate investing?

What I do have is REAL and USEFUL information.

If you use my course information correctly, and work hard, I know
you will be successful. If that means buying a sports car –
please, by all means enjoy yourself. Personally, I got involved in
real estate investing to give myself more free time to enjoy life
and not be tied down to a 9 to 5 job.

What I have done is try to separate the junk and hype from the REAL
INFORMATION.

Order the full course here at my website:

“Buy Your First Apartment Building E-Course”

Sincerely,

Ted Karsch
Creator of the “Buy Your First Apartment Building E-Course”