How apartment financing works: construction loans, permanent loans, equity, interest rates and how the cost of capital becomes part of every month’s rent.
Almost no housing is built with cash. A typical project is funded by a construction loan that is later replaced by a permanent loan, with the balance covered by equity from the developer and outside investors. Lenders limit how much they will advance against cost or value, which is why equity, the most expensive money in the stack, is always required.
The cost of that capital is not a footnote; it is one of the largest components of required rent. Debt has to be serviced every month, and equity has to earn enough to justify the risk it takes. In this section we explain how loans are sized and priced, how amortization and the mortgage constant turn a loan balance into a monthly payment, and how a change in financing terms changes the rent a building needs.
We build an illustrative 120-unit apartment project on paper, line by line, and show where every dollar of the rent it requires comes from.
Housing 101
The owners of a new building put in the money that absorbs losses first. This lesson explains why that money has a price, how the price is measured, and what happens to construction when it is not paid.
Housing 101
Most of the money in an apartment building is borrowed. This lesson explains the construction loan, the permanent loan, how lenders size them, and how the mortgage constant turns debt into rent.
Housing 101
Revenue, vacancy, operating expenses, net operating income, yield on cost, cap rate, DSCR, cash-on-cash. The pro forma decides whether a building gets built. If the math does not close, nobody builds.
Housing 101
Lenders and investors front the cost of a new building in layers, each with its own risk and return. Renters repay them through rent, and sometimes the public covers part of the cost through subsidies.
Interest Rates
A one-point rise in the loan rate adds about $93 a month to the rent our illustrative 120-unit project requires, before investors and construction lenders reprice. We show the arithmetic and the second-order effects.
Regulation
Nothing about the building changes when construction start slips a year. The land loan, the taxes, the consultants and the contractor's price keep moving. We add it up and convert it into rent.
The evergreen pieces that explain the mechanics behind everything else in this topic.
Housing 101
The owners of a new building put in the money that absorbs losses first. This lesson explains why that money has a price, how the price is measured, and what happens to construction when it is not paid.
Housing 101
Most of the money in an apartment building is borrowed. This lesson explains the construction loan, the permanent loan, how lenders size them, and how the mortgage constant turns debt into rent.
Housing 101
Revenue, vacancy, operating expenses, net operating income, yield on cost, cap rate, DSCR, cash-on-cash. The pro forma decides whether a building gets built. If the math does not close, nobody builds.
Housing 101
Lenders and investors front the cost of a new building in layers, each with its own risk and return. Renters repay them through rent, and sometimes the public covers part of the cost through subsidies.
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