Apartment Financing Explained

So you're interested in entering world of property management? Have you thought about how you're going to get into this potentially lucrative market? Let's face it; unless you've just inherited a large sum of money or are otherwise independently wealthy you're going to have to borrow. This is where apartment financing comes in.

Before you go down to local bank or investment company, it might be a good idea to ask yourself how long you expect to own apartment building or complex. Is this a long-term investment? The answer to this question can significantly impact type apartment financing you should get.

If you are planning on owning property for a couple of years or less, most experts agree that an adjustable rate mortgage (ARM) will be your best method of apartment financing. Like name suggests, an ARM is a loan will an interest rate that may change with time in accordance with an index. ARMs will usually offer a better initial interest rate than other loans in order to offset risk of future interest rate fluctuations. Moreover, mortgage holder is also protected by a maximum interest rate, or ceiling, that may be reset every year. Individuals planning to stay in property management business for long term may want to look into a fixed rate mortgage. A fixed rate loan will guarantee same interest rate over life of mortgage.

If interest rates are historically low at time you receive loan, this type of loan will lock you in at best possible rate. On other hand, if interest rates are historically high at time of loan, you could be stuck paying higher interest than you would have with another method of apartment financing.

Another important question you may want to think about before seeking an apartment financing source is estimated cost of property. This may seem like a fairly obvious question to consider when looking for a loan, but far too many first-time investors just take interest rates they're given without question. If property you're interested in is selling for over $500,000, a direct lending source or investment company can give you a better interest rate than most banks or credit unions. However, if you're looking at a smaller apartment building selling for under 500k you may want to see what your local bank can offer you.