I currently have two renal properties a multi family and a single family and am interested in expanding to something larger. I’m wondering how much liquid capital is needed to purchase an apartment building. I would be looking for a 6+ unit building with 20-25% down. In addition to the down payment I imagine lenders look for a certain amount of reserves. Would I also need cash for repairs in addition to reserves? Is there a good way to calculate what I will need?
Rental Property Investor · Sacramento, CA · Member since 2018 · 51 posts · 11 votes
3y
You'll have to calculate this on an individual basis by the property.
As you said, 20-25% down is usually the minimum.
You'll have to meet underwriting for the Debt Service Coverage Ratio (DSCR), meaning your NOI will have to be 120% or 125% of your Debt Service, depending on the lender. This could increase your required down payment, or, hopefully, give you a negotiation point.
But the biggest variables in this are Operating Costs and CapEx. Are you hiring a manager or running it yourself? Are you hiring a landscaper, pool service, handyman? those costs will add to your reserves if you're playing it smart.
How new is the roof? Windows? HVAC? Does the pool need work? how is the pavement? Each of these, and everything else in the property, require maintenance and replacing at a certain frequency plus occasionally when you don't expect it. Smart operators set money aside for CapEx every month, and you'll want to have a reserve for this before buying, commensurate with what you expect may fail before you can save additional dollars.
You could probably buy with just the down payment, but the lower your reserves, the higher your risk.
Meriden, CT · Member since 2018 · 698 posts · 500 votes
3y
These loans are generally at 20-25% down but are based on the debt service coverage ratio (DSCR). Basically they will lend up to a certain DSCR (usually something like 1.2X). This means that your Net operating income has to be 20% larger than the principle plus interest payment. As long as you buy with this in mind, you should be good.
If the property cannot perform with 1.2X DSCR at 75% LTV, your loan percentage will go down until you get to a 1.2X DSCR.
Real Estate Agent · Orem, UT · Member since 2021 · 98 posts · 80 votes
3y
They tend to go heavily off of the Debt Service Coverage Ratio (DSCR). So how much capital you need will largely depend on the deal. Most lenders want to see at least a 1.25 DSCR. As far as reserves go, they would love to see 6 months, but that doesn't mean they won't do the deal without it right out of the gate. They will look at your net worth and current reserves and tell you what they require.
Commercial lending is kind of the Wild West when compared to residential mortgages. That's not a bad thing though, a lot of the time it can be helpful.
Rental Property Investor · Sacramento, CA · Member since 2018 · 51 posts · 11 votes
3y
You'll have to calculate this on an individual basis by the property.
As you said, 20-25% down is usually the minimum.
You'll have to meet underwriting for the Debt Service Coverage Ratio (DSCR), meaning your NOI will have to be 120% or 125% of your Debt Service, depending on the lender. This could increase your required down payment, or, hopefully, give you a negotiation point.
But the biggest variables in this are Operating Costs and CapEx. Are you hiring a manager or running it yourself? Are you hiring a landscaper, pool service, handyman? those costs will add to your reserves if you're playing it smart.
How new is the roof? Windows? HVAC? Does the pool need work? how is the pavement? Each of these, and everything else in the property, require maintenance and replacing at a certain frequency plus occasionally when you don't expect it. Smart operators set money aside for CapEx every month, and you'll want to have a reserve for this before buying, commensurate with what you expect may fail before you can save additional dollars.
You could probably buy with just the down payment, but the lower your reserves, the higher your risk.