Who services the debt!

Who services the debt…?

What is debt service…?

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In the world of commercial real estate, “debt service” is what is referred to as the ability of an apartment building to pay the mortgage on the property. More specifically the cash from all collected income for the month and year. 

You see when bought correctly apartment buildings provide cash flow to investors. This is one of the main reasons people invest in this asset class. Before cash flow the debt or loan on the property needs to be paid. The yearly debt service is determined based on the size of the loan at origination. 

What kind of loan all depends on the business strategy of the investment. Different properties require different types of loans. A brand new 2021 build that is stabilized with strong cash flow won’t require a bridge loan. This is the kind of deal you would just acquire and generate strong cash flow with appreciation over the life span.

An older apartment building that needs renovations and is below market rents would need a different loan product. Maybe for a portion of the loan term there is some years where the loan would be interest only. This would allow current ownership to complete renovations, turn the units, and lease them at market rents. 

These two examples would have two completely different debt services. There is no one size fits all with the debt. The debt is senior to the equity and depends on the deal itself more specifically how the deal is structured and what the business plan is.
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In a profit and loss statement debt service looks like this…

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Effective Gross Income
-Operating Expenses

Net Operating Income‍

-DEBT SERVICE‍

Cash Flow

This formula is oversimplified, but what I want you to see is the DEBT SERVICE is below the NOI. Why … because it’s optional, however all investors know that using debt is good. (This kind of debt is great!) By using a loan on the property the returns of the individual investor are improved. 

So who services the debt? 

You are using Other People’s Money to leverage your position and the debt is being paid off by other people.

So who services the debt? Think about that.

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The best investment on earth is earth.

~ Sean

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