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 list once they understand what they are producing.

Critical items to complete are:

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

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

• loan to value (LTV),
• Debt Service Coverage (DSCR), and
• Projected value based on a range of CAP rates (Cap Rate is a % used to divide NOI) (income after direct expenses but before debt service, depreciation, and taxes).

critical financial charts

Capital Improvement 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 usually debt and equity. 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 income, expenses, taxes, depreciation, capital costs, financial cash flows, and net cash flows provided in a month-by-month format over a period of 3 to 5 years. Most financiers will provide a minimum projection of 3 years.

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

Return Expectations – Typically you will provide a calculation of the internal rate of return, the cash-on-cash return, and the annual return on investment from the cash flows.

metric keys

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

DSCR – This is the ratio of net operating income (NOI) to 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.

Capitalization Rate Based Value – 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 cap rates and tertiary markets will trend higher.

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