Escrowing Insurance/ Taxes & CapX Reserves

6 Replies

Hi all,

Been doing some research about the multifamily closing process and was wondering the following: Do your escrows for Insurance and Taxes come out of pocket? Or can they be included in the loan amount? How about CapX reserves... part of the loan amount... or out of pocket expense?


Thanks for taking the time to clarify!

@Jeff D. Your tax and insurance escrows come out of pocket if you're using your own money or they're included in your capital raise if you're syndicating. The CapEx budget will vary from lender to lender. If you're dealing with a lender that's funding your loan based on the LTV (loan-to-value), then you will be responsible for the CapEx budget. If you're dealing with a lender that's funding your loan based on the LTC (loan-to-cost), then the lender will fund part of the CapEx budget (usually a large part of it).

@Jeff D.

If you’re doing a standard Fannie/Freddie 2-4 unit then your capex will come out of pocket.

Regarding your "closing costs, prepaid, and escrows" those are also generally out of pocket but you can have your seller pay a few thousand dollars usually towards those costs to offset your cash out of pocket. Most sellers will want to be compensated for that request though by pumping the purchase price by whatever dollar amount you're requesting them to pay.

Someone please correct me if I’m wrong regarding the taxes and insurance...

Thanks for the clarification @Charles Seaman ! Assuming you're using a lender who's underwriting based on LTV, is this where a bridge loan would come into play if you didn't have the funds to meet the CapX reserves required by the lender?

Also: I've seen that 3% of the loan amount is a good assumption for closing costs. Any other good rules of thumb you can think of that a syndicator would need to keep in mind when raising capital besides that 3% and a 30% equity contribution assumption?

@Jeff D. it depends on what type of loan, but typically your taxes and insurance are included in your monthly mortgage. If you are doing agency financing for a larger multi, they are now requiring one year of escrow on taxes, insurance and mortgage payment, which would be added to your closing costs and kept in escrow, but they don't want them really used towards any if those expenses for the first year

You're welcome @Jeff D. Bridge financing can be helpful because they typically will fund loans on an LTC basis, meaning that your capital raise will be less. However, you'll pay a higher interest rate in exchange for that, so play with both scenarios to see which option makes more sense for you.

3% of the purchase price should generally keep you safe for closing costs on most transactions. The equity contribution assumption will vary largely based on the market that you're investing in, the past financial performance of the property, and a few other factors. If you're in a larger market, you can usually get away with a 20% down payment. If you're in a tertiary market, you'll probably need 25% or 30% for the down payment. So your equity contribution will vary based on the amount of the down payment and the CapEx budget. If you're brand new, also keep in mind that you'll need to budget for lender required reserves that most lenders require due to the pandemic.

@Jeff D. You can get a thousand answers and non of them can be correct because we do not really know what you are doing or what type of Multifamily property you are researching. If you a looking at a 50 unit building for $10,000,000 dollars or a 3 unit building for $300,000. We do not know if you are looking at Agency Multifamily financing or Small balance Alternative financing etc. What would be helpful and you will get direct advice for what you are looking to do, is to give us more details with at minimum the purchase price range and the number of units you are looking at. Additional info that would be helpful is what type of Multifamily properties you have owned or managed meaning specifically, how many units in each building. Some program requires a Sponsor (borrower) to have like experience.

At that point I can give you direct advice for the type of project you are looking to do. Also keep in mind, that if a project is not agency, that means it is portfolio. For portfolio loans, the lender creates their own guidelines. Many have the same general guidelines but they will all vary.