How to buy an apartment building when you don’t have income

Sometimes people come to me with the following problem: They have a bunch of cash, but they don’t have much (declared) income. They want to buy an apartment building but they don’t know how.

It turns out that it’s much easier to help these people buy 5+ unit buildings than it is to help them buy a 3-4 unit building. Why?

First, as discussed previously, 5+ unit buildings tend to be better deals, all things considered. Obviously, if you qualify for FHA, a 3-4 unit is great. But, if you already own property and therefore have to put down 25%, you’re better off going bigger; you get more for your money.

Second, lenders on commercial loans are much more interested in the asset than they are in the borrower. This means that, if the debt service coverage ratio works (usually they want to see 1.2 now), the bank doesn’t care that much about your reported income. After all, they’re expecting the rents to pay the mortgage. If, somehow, you screw that up, they get to take the building away from you at a price that’s 75% of what you paid… in other words, a good deal for them.

So, if you’re sitting there with a load of cash in the bank earning 0.25% and you want to do better, consider buying a larger building. At any reasonable price, you’re looking at probably 6-7% / year in cash, plus a bit more when you consider the fact that you’re paying down your loan.