What can be used as reserves for apartment?

Question

Hi! I'm doing the analysis for my first apartment complex - fingers crossed! Curious what can be used for reserves - I know for SFR's the banks have accepted 401k funds. Could free-and-clear property count as reserves, or as collateral somehow? We have always invested just us and bank money, but are wondering if we would need to bring in a partner for this deal. Thank you!

Account Closed · Answer

If it is free and clear could you set up a HELOC for the SFH to show reserves that are accessible.  You’d have to speak to the lender about it though for final approval.

Todd Dexheimer · Answer

For your sake I would use cash or something very liquid. Reserves may need to be accessed and if they do you don't want to put yourself in a bad position.

Simon C. · Answer

You're welcome @Rachel Luoto - its a white paper put out by old capital podcast.

http://www.oldcapitalpodcast.com/whitepaper

Kevin Dean · Answer

Hey @Rachel Luoto great question, we use cash for replacement reserves on our properties.

Depending on the year of construction, current state of on site operations, the business plan and the deferred maintenance, we put between $250 and $350 per unit in cash reserves.

The key is to make sure that whatever way you plan on funding reserves for the property are as liquid as possible and can be accessed easily at any time.

We see these reserves as an expense and we are fine with the opportunity cost of it being in cash, it gives us room for the unexpected.

Simon C. · Answer

Hi @Rachel Luoto, I hope the following excerpts help - this is in regards to commercial loans:

"Cash Reserves

“Post-closing liquidity” (lots of cash in the bank after the deal is done) is critical for loan

approval.  For newbies, the lender may require reserves between 20-30% of the loan amount to be held.  The lender wants to see bank or investment statements that support your personal liquidity. Those reserves cannot be

equity in other real estate investments or IRA’s or 401k’s.  Lenders want to see cash, stocks or

bonds in your name.  If there is an unexpected loss, the lender wants you to be in a position

to pay for that expense, not them."

Rachel Luoto · Answer

Thank you Account Closed where is it quoted from? I'd like to look into further!

Rachel Luoto · Answer

@Todd Dexheimer I agree with you there. Property is fully rehabbed but I know a local investor who got a surprise mandatory $90k bill to upgrade sewer lines... so anything can happen!! I have considered adding partner who has experience/reserves for that reason.

What can be used as reserves for apartment?

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