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What is an Apartment Loan?

By Carol Francois
Updated Jan 24, 2024
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An apartment loan is a financing instrument used to allow property management firms or investors to purchase apartment units. These units are then rented out to tenants. The monthly rent paid is used to pay down the apartment loan and provide a revenue stream for the property management company.

An apartment is a single unit inside a larger building of multiple, independent housing units. Each apartment contains a kitchen, bathroom, sleeping and living area. Apartments are commonly found in large cities or locations where land is expensive and there is a large demand for living space. It is an efficient utilization of space and increases the number of people who can live in a specific area.

There are three steps required to obtain an apartment loan: a down payment, an acceptable credit rating and a business plan. It is important to distinguish between an apartment loan and a mortgage. Mortgages are typically for land and building. An apartment loan is for a specific unit or number of units in a larger apartment building. The property itself is an asset for the building owner and not the apartment owner.

To qualify for an apartment loan, you must have a minimum 15% cash down payment. The cash can be from private sources or a second financing company. The minimum credit rating required is a beacon score of 640. The beacon score is a value created by the Equifax Credit Bureau, based on payment history, debt to income ratio and other factors. It is used to determine the credit worthiness of a loan applicant.

As an apartment loan is for a specific unit or set of units, the business plan must provide details on potential tenants, and identify who will be responsible for property maintenance and management. In addition to this information, some proof of an independent income stream to sustain the business is often required. Each apartment loan financing company has different guidelines, so it is important to check the qualification requirements. Some firms will only finance apartment loans for buildings with at least five units and others will only work with properties than have a limited number of commercial tenants.

As with all loans, it is important to read the fine print before signing a contract. The terms of the loan must be clearly defined. This includes the interest rate, length of the contract, penalties for late payments, and the prepayment clause. Many apartment loans are made to large property management firms. The cost of the loan is considered a cost of acquiring the assets and is incorporated into the pricing schedule for the unit rentals.

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Discussion Comments
By WendyS — On Apr 26, 2010

Thank you for posting these great tips!

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