How much down payment do I need for an apartment building?
Buying an apartment building typically requires 20 to 25 percent down on a stabilized property and 25 to 35 percent on a value-add or lease-up deal. The real constraint is coverage: the loan is sized so net operating income covers debt service by 1.20 to 1.25, which in a low-cap-rate market can force the down payment above 30 percent regardless of the lender's leverage cap.
The two constraints
| Constraint | Typical standard |
|---|---|
| Loan-to-value cap | 75 to 80 percent stabilized; 65 to 75 percent value-add |
| Debt service coverage | NOI ÷ annual debt service of 1.20 to 1.25 |
The loan is the lower of the two. Ranges vary by lender.
A worked example
Twelve-unit building, price $2,000,000, net operating income $130,000 (a 6.5 percent cap rate).
- 75 percent of value: $1,500,000.
- Coverage at 1.25 with a 7 percent rate and 30-year amortization: annual debt service allowed is $104,000, which supports a loan of about $1,300,000.
- Loan: $1,300,000. Down payment: $700,000, or 35 percent.
At a 7.5 percent cap rate ($150,000 NOI) the coverage-sized loan rises to about $1,500,000 and the down payment falls to 25 percent. The cap rate and the interest rate decide the down payment more than the lender's grid does.
Where the money can come from
- Your cash and business funds.
- Partners in the ownership entity; lenders want each 20 to 25 percent owner as a guarantor on recourse loans.
- Equity from other properties through a cash-out refinance.
- Seller financing in second position, allowed by some banks and bridge lenders, rarely by agency lenders.
- Retirement funds through a self-directed structure.
Reserves on top
Expect the lender to require six to twelve months of debt service in reserves after closing, plus replacement reserves of $250 to $350 per unit per year collected monthly on agency and many bank loans. Closing costs on a commercial loan run two to four percent including the commercial appraisal, environmental report, legal, and lender fees.
Value-add deals
On a building with vacancy or below-market rents, lenders size the loan on current income, not projected income. That means a larger down payment now, with the plan to refinance after rents are raised. Bridge lenders will lend on the business plan at 65 to 75 percent of cost with an interest reserve.
Lowering the cash requirement
- Buy at a higher cap rate; coverage sizes the loan.
- Use a longer amortization; 30 years supports a bigger loan than 25.
- Bring a partner with cash into the entity.
- Negotiate seller financing where the senior lender allows it.
- Use interest-only years on agency or bridge loans, which improve coverage in the early years.
How CommFi handles it
Our lending desk sizes the loan on coverage and value across bank, agency, and bridge structures and shows you the real cash requirement before you offer. It funds direct when it fits, and when a bank or agency lender is the better fit, the desk searches a database of 7,000+ lenders and the ones that fit compete for the file. Zero upfront fees.
Related reading
Related questions
- How much down payment do I need for an apartment building?
- Typically 20 to 25 percent on a stabilized building, 25 to 35 percent on value-add, and more when the cap rate is low relative to the interest rate.
- Why is my multifamily loan smaller than 75 percent of the price?
- Because the coverage test sized it. Net operating income has to cover debt service by 1.20 to 1.25, which limits the loan in low-cap-rate markets.
- Can a seller carry part of the down payment on an apartment building?
- Some banks and bridge lenders allow a seller second. Agency lenders generally do not.
- Do I need reserves to buy multifamily?
- Yes, typically six to twelve months of debt service after closing plus monthly replacement reserves.
- Can partners contribute the down payment?
- Yes, as members of the ownership entity. Each 20 to 25 percent owner usually signs as a guarantor on recourse loans.
Property developer and licensed appraiser. 22+ years in real estate: TIC conversions, multi-unit redevelopments, mixed-use, fix and flips, commercial DSCR.