How much cash it really takes to buy an apartment building in Texas

The short answer: 20 to 35 percent, and the building decides where you land

For a five-unit-or-larger apartment building in Texas, plan on a down payment of roughly 20 to 35 percent of the purchase price. As we laid out in a market update on our site, a stabilized, well-located property financed through Fannie Mae or Freddie Mac can reach about 75 to 80 percent loan-to-value, which means 20 to 25 percent down, while a value-add property on a bridge loan typically needs 25 to 35 percent or more. Then add cash for closing costs, third-party reports and reserves on top of the down payment.

That range frustrates people who want one number, but the spread is real. At Terrydale Capital we see buyers walk into an offer assuming 20 percent because they heard it from a friend, then find out the building they picked only supports 65 percent leverage. This guide walks through how the number actually gets set so you can budget before you write the offer, not after the lender's first quote.

Four units and five units are financed in different worlds

The first dividing line is unit count. A property with four or fewer units is financed under residential-style rules, and a property with five or more units is commercial multifamily. That one extra unit changes who the lender is, how the loan is underwritten and how much you put down.

On the small end, residential-style investor programs that qualify a property on its rental income, often called DSCR loans, generally cap purchases at about 75 percent loan-to-value, according to the same market update, and refinances closer to 70 percent. Once you cross into five units and up, the lender is mainly underwriting the building's income, and the down payment follows the building's numbers and the loan program rather than a fixed rule.

What each loan type usually asks you to bring

These are the typical ranges we published for Texas apartment purchases. Think of them as starting points that a specific property and sponsor can move in either direction.

• Fannie Mae and Freddie Mac agency loans: about 20 to 25 percent down on stabilized, well-located properties, with full financials and a longer underwriting process.
• DSCR loans: generally 20 to 25 percent down, with smaller buildings and short-term rental conversions sitting closer to 25 percent.
• Conventional bank loans: usually 25 to 30 percent down, depending on your relationship with the bank, the property's condition and the local market.
• Bridge loans for value-add deals: typically 25 to 35 percent or more, because the lender is betting on a business plan rather than proven income.
• Two- to four-unit properties on residential-style programs: about 25 percent down on a purchase.

The same building, two different checks

Here is the worked example from our market update, because it shows why the loan type matters as much as the price. Take a stabilized 24-unit property in Fort Worth listed at 3.2 million dollars. With an agency loan at 75 percent loan-to-value, the down payment is about 800,000 dollars before closing costs. A conventional bank loan at 70 percent asks for closer to 960,000 dollars down.

That is a 160,000-dollar difference on one building, with the same rents and the same tenants. A DSCR loan at similar leverage to the agency option lands near the same down payment, with different pricing and paperwork. None of these is automatically the right answer. The agency loan may carry prepayment terms that do not fit a short hold, and the bank loan may come with a relationship that helps on the next deal. If you are weighing those trade-offs, I wrote a separate comparison of agency, bank and bridge loans for apartment buildings.

Why the down payment can grow after you are under contract

Loan-to-value is a percentage of the lower of the purchase price or the appraised value. If you agree to pay 3.2 million dollars and the appraisal comes in lower, the lender's 75 percent applies to the appraisal, and the difference comes out of your pocket. Buyers in competitive bidding situations around Dallas run into this when they stretch on price to win the contract.

The second way it grows is through loan sizing. A lender will offer the lesser of the loan-to-value amount and the amount the property's net operating income can support at the current rate with the required coverage. When rates move up between your offer and your rate lock, or when the lender's underwriting trims the income you presented, for example by applying a higher vacancy factor or a higher insurance cost, the supportable loan shrinks and the down payment rises. That is why we underwrite the income conservatively at the start. A pleasant surprise at closing is much easier to live with than a shortfall.

• Keep a cushion above your expected down payment, especially on a competitive offer.
• Check that your contract's financing and inspection periods give you time to react to the appraisal.
• Use the actual trailing income, not the seller's projections, when you estimate the loan.

What pushes your down payment up or down within the range

Inside each range, a few factors decide whether you sit at the low end or the high end. Lenders size the loan as the smallest of several tests, so the weakest number on your deal usually sets the leverage.

If you have a property in mind and want to know where it will likely land before you make an offer, this is the right point to have someone run the numbers with you.

• Stabilization: a fully leased property with no deferred maintenance earns better leverage than one with vacant or down units.
• Debt service coverage: lenders typically want a ratio between about 1.1 and 1.5, our update notes, and a stronger ratio generally means more loan and less cash down.
• Sponsor experience: buyers who have owned and operated similar buildings can often negotiate better terms than first-time buyers.
• Liquidity and net worth: lenders want to see that you can cover reserves and surprises after closing, not just the down payment.
• Property type and location: the appraiser and lender compare your building to nearby comparables, not to a metro average.

The cash that is not part of the down payment

The down payment is the biggest check, but it is not the only one. Buyers who budget only for the down payment end up scrambling in the last two weeks before closing, and that is a bad time to be short.

Third-party reports are usually the borrower's cost, and you pay for them whether or not the loan closes. Closing costs include lender fees, legal fees, title and escrow, and any broker or advisory fee. Many lenders also require reserves at closing, for example for replacement items, taxes and insurance. If you plan renovations, the renovation money is usually separate equity unless the loan is structured to fund it. Ask any lender or advisor for a full sources-and-uses estimate early, and do not let anyone quote you only the down payment.

• Appraisal, Phase I environmental report and property condition report
• Survey and title work, including any curative items
• Lender, legal and closing fees
• Upfront reserves for taxes, insurance and replacements, if the lender requires them
• Your own renovation budget and an operating cushion for the first months

Ways to bring less of your own cash, and what each one costs you

If the required equity is more than you have, there are legitimate ways to close the gap, but every one of them has a price. The most common is bringing in partners or investors, which costs you a share of the cash flow and the upside, and means you need a clear operating agreement before closing. Another is negotiating the price down, which raises your leverage on the lender's math without borrowing more.

Higher-leverage short-term debt is the third route. A bridge loan or hard money can reach leverage a permanent lender will not, at a higher rate and with a refinance you have to execute later. I explain when that trade makes sense in the real costs of hard money on commercial property. What I would not do is stretch into a building that only works if everything goes right, because the down payment you saved can disappear quickly when the refinance math does not cooperate.

If you are still choosing a property, a commercial investment broker such as Julie Smith can help you find buildings that fit the equity you actually have, which is easier than forcing financing onto the wrong one.

How we size your equity before you sign a contract

Since I moved into commercial mortgage banking in 2012, the conversations that go best start before the offer. Send us the offering memorandum or the rent roll and trailing operating statement, the asking price and a short note on your experience and your plan for the building. We underwrite it the way a lender would and show you the likely loan amount under the realistic options, the resulting down payment and the other cash you need to close.

From there, if you go under contract, we present the deal to several banks, national lenders and family offices so you see competing terms instead of one answer. If you want to get ahead of the paperwork, my guide to the loan package lenders expect lists what to gather. You can submit a deal through Terrydale Live for live quotes or schedule a call with me to talk it through first. Our office is in Dallas, and most of the recent closings listed on our site are Texas properties, but the math works the same wherever the building is. Either way, you will know your number before the earnest money goes hard.

Questions people ask me