How much saved cushion when buying a multifamily

Question

Hi all,

How much cushion should you have saved for fees and misc expenses when buying say an investment multifamily property?

For example say I have $100,000 saved and go to buy a $400,000 complex with 20% down so 80k down. is that 20k cushion enough to cover any misc expenses/emergencies or things that may arise on a typical deal? I know for personal finance 6 months expenses is generally a guideline for an emergency fund, is there a similar amount or % of property value to hold as an emergency fund? Thanks

Stewart Beal · Answer

I would recommend 10% of the purchase price if the property is in good shape and you do not anticipate having to do major work in the short term.  If you know it needs work, than budget for that work + 10% of the purchase price.

Rick Martin · Answer

@Tanner Morrill, capital reserves. Not Capex budget. Capital reserves and operating capital are separate from the Capex (renovation) budget.

Tanner Morrill · Answer

Rick, so a 300 unit complex would have 300x$300=  $90,000 or so in capex? That doesn't sound like very much for older properties, right?

Rick Martin · Answer

@Benjamin Brooks it sounds like a small MF deal, so try using the BP calculator if you haven't. The 10% reserves (of the purchase price) would be to cover ongoing maintenance and repairs. You may need to go in with an operating budget. In large multifamily, this is $1000/door and 1 mo's revenue (some will do 1 month's expenses). Ongoing capital reserves in larger MF is $250 - $300 / door. Both could be applied here.

Benjamin Brooks · Answer

Thanks Stewart, exactly what I was looking for. Thank you.

Mack Benson · Answer

If this is a true multifamily property and not a 1-4 unit then your lender will likely have reserve requirements. Local banks will differ greatly but right now agency debt is typically requiring 12 months of P&I to be held in an escrow account. They will also probably want 12 months of capex reserve to be held along with 6-12 months of insurance and property tax pre-paid. Depending on the age I am currently underwriting $250-$350/unit/year for capex budget.

If it's only $400,000 you probably won't be doing agency debt so you'll work with a local bank and just about everything is negotiable. At a minimum I would have the capex amount along with the amount of the estimate for any repairs I identified during my due diligence or property tour.

Tanner Morrill · Answer

Sewer line replacements can be 10-15 k just by themselves. I would feel a bit on thin ice with less than 40k. That's just me. I am a newbie to Multi-family.

How much saved cushion when buying a multifamily

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