In the world of multifamily underwriting, numbers can look great on paper. Until reality hits.
What separates the deals that survive from those that stumble is often … reserves and buffers built into the deal… or more accurately, the lack of them.
Why Reserves Matter
You cannot predict everything that will happen once you own a property.
You may forecast reasonable rent increases. You may even account for rising expenses.
But few investors forecast insurance premiums doubling or tripling in some markets. Or a three-month permit delay. Or a plumbing issue that suddenly costs $20,000 more than expected.
That is where reserves come in. Not as a checklist item, but as a true financial buffer that protects the entire investment.
Types of Reserves I Look For
- Operating Expense Reserves (Opex)
– I prefer to see at least: Six months of operating expenses plus six months of debt service
This combination provides roughly ten to twelve months of total coverage.
– Anything less, and I start asking: What happens if something unexpected hits in Month 3? - Capital Expense Reserves (Capex)
Capex projections should be:- Validated by both a property manager and a contractor
- Backed by a 10 to 15 percent contingency buffer
Without this, the project is operating without a safety net.
A Pattern I See Too Often
Many of the deals I have recently passed on had one thing in common: inadequate reserves.
Some had no reserves at all. Others had only one to three months of coverage. That is not sufficient in the current market environment.
When the unexpected shows up — and it will — those are the deals that run into cash flow problems, deferred maintenance, and tough conversations with investors.
What Reserves Really Offer
- Breathing room when insurance costs spike
- Flexibility when a unit turn takes longer than planned
- Confidence during periods of lease-up volatility
- Leverage when negotiating vendor pricing and timelines
This is not about being overly conservative. It is about being prepared.
Final Thought
The magic of reserves is not that they make your deal look better on a spreadsheet. They rarely do.
The magic is that they make your deal stronger. More resilient. More likely to perform over the long term.
In today’s market cycle, that is not optional. That is the standard.
Vessi Kapoulian,
Breaking down multifmaily underwriting one step at a time to create educated and empowered investors
P.S.
If you need a second set of eyes on a deal, I am here to help. Send me a message and we’ll schedule a complimentary call.