Financing Apartment Buildings—Cash on Cash Return and Cap Rates

Financing apartment buildings is a lot easier that most people think. It’s all about the income that is generated from the property. Commercial buyers and brokers use Cash-on-Cash return and Cap Rates to analyze the deal.

Cash-on-cash return is looking at how much money you have to take out of your pocket to purchase the building, then how much you get back at the end of the year after all expenses and debt services have been paid. For example, your down payment and closing cost are $120,000 and at the end of the first year, your profits were $12,000. That is 10% cash on cash return, which is average for an apartment building. Anything less than 10 – 12% return is not a great deal. It means you are either overpaying for the property or didn’t get the best financing.

Cap rates, short for capitalization rates, is a formula that’s used in the commercial industry, to show how much income is being generated from the property had you paid all cash for the property. For example, you paid $1 Million cash for a property that generated $100,000 net operating income. This would be a 10% cap rate. Of course you’re not going to hand over $1 Million cash for a property; this is just to simplify the explanation of cap rate.

Market cap rates vary in different cities and with different classes of apartment buildings. There are 4 different classes, ranging from A to D, A being brand new to 10 or 15 years old, with all the amenities of new buildings including pools, fitness centers and gated communities. Class B are 10-15 years up to 20-25 years old with whatever amenities were most common in their time. Class C are about 20-25 years old up to 40 years old and in need of more maintenance. Class D are like class C, with the only difference being that they’re the ones you hear about in the news, for the wrong reasons.

With good market research and analyzing of the numbers, the lender will be more likely to finance your deal. Remember that the lender is your friend; he has done the same analysis of the property that you have done. He is putting his money on the line, so he will be likely to catch something if you should miss it. It’s a good idea to develop a relationship with a lender and appreciate his concern, even if he denies the loan based on his analysis; chances are, he’s saving you from making a costly mistake.


This was taken from an interview between Lance Hood from SuccessInsiders.com and Anthony Chara. For access to Anthony Chara’s teleseminars, go to http://www.successinsiders.com/



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Real Estate, Investment, Success, Buying Apartments, Purchasing Apartments, Cash on Cash Return, Cap rates