How lenders size a loan on a small apartment building

When a lender looks at an apartment building, three numbers set the loan amount. Whichever produces the smallest loan wins.

Loan-to-value. The loan divided by the appraised value. Most banks cap this around 70 to 75 percent on investment property.

Debt service coverage. The property's net operating income divided by the annual loan payment. Lenders want the income to cover the payment with room to spare, usually 1.20 to 1.25 times.

Debt yield. Net operating income divided by the loan. Some lenders want this at 9 or 10 percent, so the loan stands on the property's income regardless of what the appraisal says.

Take a building worth $3,200,000 with $255,000 of net operating income. At 75 percent, the value supports $2,400,000. At today's rates, the income covers roughly the same. So the realistic loan is about $2.4 million, whatever the owner hoped for.

One thing that trips people up: the net operating income a lender uses is not the one on the listing sheet. Underwriters rebuild it with a vacancy factor, a management fee even if you self-manage, reserves for repairs, and property taxes as they will be after a sale, not as they are today. That rebuilt number is usually lower, and every dollar of difference moves the loan by ten or twelve.

We run these numbers on every deal before a lender sees it, so the ask matches what the market will actually do. If you want to know what your building supports, send us the numbers.