Saint Paul, MN · Member since 2016 · 34 posts · 7 votes
I recently purchased a 4-plex and would like to start setting up for purchasing at least 15+ unit building in the Minnesota/Wisconsin area. I am wondering how cash reserves are reviewed for such a purchase? I would be pulling the down payment from IRA/401K and looking in the price range of $700K - $1.5MM. How much cash on hand would I need for this? Is there any other things I need to be aware of? Sorry for all the total newbie questions, but I need to start planning now. It's either a multi unit building or a liquor store to plan for in the next 2 yrs.
Quincy P. To be overly general:
25% down
9 months PITI
Net Worth > Loan Amount
Full recourse
5 or 7 years fixed-rate
20 or 25 year amortization table
And be prepared for a rough first year. There’s always some kind of “stabilization” that happens over the first ~9 months. Tenants move out, you find nit-pick issues that didn’t show up on the inspection, you’ll find one tenant you wish wasn’t there, etc. It just happens.
If it doesn’t happen, great! But it’s best to have a little money set aside in case that it does.
@Quincy P. a good rule of thumb for cash reserves is 5% of purchase price (above and beyond what's already budgeted for capex). Otherwise, you'll need at least 20% down (typically 25-30% down but some local lenders will only require 20%), but to @Mark Bookhagen's point you'll want to call around to a few local banks / credit unions and see what they would want to see from you and what they would typically charge for origination fees etc.
I find it best to have a sample deal on paper so they can see what kind of product you're looking at. You can pull down a marketing package from loopnet or something and base your hypotheticals off of that.
I would also highly recommend doing some more multifamily specific research - some good resources are @Michael Blank and Joe Fairless' websites:
As others have said, 25% down, closing costs and depending on the bank, they may require 3, 6, 9 or 12 months worth of principal and interest in liquid funds. That's not counting any renovations you want to do.....that's extra. I also have seen loans without the requirement for P&I funds but they were recourse loans.
As a rule of thumb you need 3-6 months of debt payments as post closing liquidity (cash on hand) and a net worth equal to the loan amount. Thats one of he benefits to syndicating and working woh other investors- easier to qualify for loans with multiple guarantors. Also be careful about using your IRA as the Downpayment as that may be a prohibited transaction for your IRA. Seek competent tax and legal advice.
Quincy P. To be overly general:
25% down
9 months PITI
Net Worth > Loan Amount
Full recourse
5 or 7 years fixed-rate
20 or 25 year amortization table
And be prepared for a rough first year. There’s always some kind of “stabilization” that happens over the first ~9 months. Tenants move out, you find nit-pick issues that didn’t show up on the inspection, you’ll find one tenant you wish wasn’t there, etc. It just happens.
If it doesn’t happen, great! But it’s best to have a little money set aside in case that it does.
@Quincy P. Before you spend your IRA/retirement money, I would suggest you investigate other ways to invest into larger deals. Write down all the different approaches, research the pros and cons of each of them. See how each of them will impact you in best case scenarios/worst case scenarios.
@Quincy P. the answer to your question is, it depends. If you are getting a local bank to lend, then the requirements will be much less strict. Right now there are local banks that will lend 80% LTV and will require little in cash reserves if you are at 1.25 DSCR or better.
As a general rule, however, you will want 25% of the purchase, another 3-5% of the purchase for closing and financing expenses and 9 months of loan payments for reserves. This will give you enough cash to be successful.
On apartment building Buy and Holds Privatecashfunding.com can do 10% down with 70% 1st, with 20% seller carry back, CLTV 90%. I'm not sure which states they lend in.