Complete financial documents for investors and lenders for residential rental investments

Many investors are unaware of the variety of financial documents required to close loans and obtain capital commitments for residential investments. The good news is that most directors can quickly satisfy the roster once they understand what they’re producing.

The critical items to complete are:

• A budget for capital improvements,
• In the capitalization table,
• A table of Sources and Uses,
• A pro forma financial
• a balance, and
• Tables showing expected returns for internal rate of return (IRR), cash-on-cash return, and annual return on investment from cash flows.

From these, the investor must provide several key metrics for investors, including:

• Loan to Value (LTV),
• Debt Service Ratio (DSCR), and
• Projected Value based on a range of CAP rates (Cap Rate is a % used to divide Net Operating Income (NOI) (income after out-of-pocket expenses but before debt service, depreciation and taxes).

Critical financial charts

Capital Improvements Budget – This is a table of planned improvements month by month. Typical categories in this table include:

• roofing
• paving
• Turning on
• hardware
• accessories
• flat
• windows
• doors
• dry wall and paint
• electric
• plumbing
• landscaping
• sewer system

Capitalization Table: This table will list investors, investor information (phone, email, address, fax number, accreditation, etc.), amount invested, ownership percentage.

Sources and uses: The sources are normally debt and equity. The uses are purchase, improvement reserve, operating reserve, legal fees, consulting fees, reports and other costs necessary to close.

Pro forma financial statements: A table of revenues, expenses, taxes, depreciation, costs of capital, financial cash flows, and net cash flows provided on a month-by-month basis over a 3-5 year period. Most financiers will provide a minimum projection of 3 years.

Balance Sheet – This is a list of assets (short-term and long-term), liabilities, and equity. Assets must equal liabilities plus equity (hence the name “Balance Sheet”).

Return Expectations – You will typically provide an estimate of the internal rate of return, the return on cash on cash, and the annual return on investment from cash flows.

metric wrenches

LTV: This is the loan-to-value ratio accepted by the lender or capital provider. Lenders typically expect a loan to be worth between 50% and 85% of the “as is” appraised value. Often investors or private debt will invest on an “enhanced” value basis. “As Improved” is typically used when extensive changes or new construction are planned.

DSCR – This is the ratio of net operating income (NOI) over charged debt service, including interest and principal. Most lenders require between 1.2 and 1.35 DSCR. Some FHA loans are bearable at 1.05 DSCR.

Value Based on Capitalization Rate – This is determined by taking the Net Operating Income and dividing it by the currently accepted market capitalization rate percentage. This is normally between 5.75% and 9%. Larger markets demand lower capitalization rates and third-party markets will trend higher.

These articles will respond to almost all investors with additional clarification as needed.