Real Estate Investing Basics

How Much Should You Have in Reserves Before Buying a Rental? (Plus, How to Do Deals If Your Reserves Are Lacking)

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Recently, this question came in on the BiggerPockets Podcast: “How much reserves should you have when you’re going to get into rental property investing?”

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How Do You Calculate Reserves?

In terms of reserves as a real estate investor, the general requirement that banks want to see is six months of your principal, interest, taxes, and insurance. This basically means your mortgage payment, which usually (but not always includes) taxes and insurance.

Now, not all banks want that. Some are OK with just your principal and interest at six months. You’ll have to ask the bank to figure out the specific requirements.

Personally, I think six months of your mortgage payment, including taxes and insurance, is a good number to have.

Here’s an Example

If your mortgage is $1,000/month for a rental property you want to buy, it’s probably a good idea to have $6,000.

So, if you’re going to buy two properties, does that mean you need 12 grand?

Yes or no… It’s different for everybody.

But I tend to think the more properties you have, the less reserves per unit you need. Why? Because it’s not likely that all your properties will go vacant at one time or that you’re going to have a problem with all of them at one time.

In the beginning, you know less, though. So, you’re going to need more reserves to cover your mistakes.

Related: The Essential Importance of Cash Reserves in a Crisis

Close up view of bookkeeper or financial inspector hands making report, calculating or checking balance. Home finances, investment, economy, saving money or insurance concept

How Much I Have in Reserves

I try to keep around $50-$100,000 in reserves for my personal portfolio. We have a couple hundred thousand dollars in reserves on our mobile home park fund. And so it kind of depends on the size of the portfolio and what you’re doing.

But you basically want to be able to withstand months of difficulty in case something goes wrong.

There’s no hard and fast number you have to have. But if you just want a good guideline, six months is a good one to abide by.

Related: 6 Ways to Get Started in Real Estate While You Save Money to Invest

What If I Don’t Have Any Reserves Yet?

Now, if you don’t have it, does that mean you can’t invest in real estate? No.

It does mean you have a good goal to shoot for: Six months after your down payment, you want that to be saved up.

But what about this…

Could you find a partner to invest with, and your partner has the reserves? Possibly.

So, maybe you bring the deal, your partner brings the down payment and the reserves. Find somebody who’s got a little bit of money right now.

Just because you don’t have it, doesn’t mean you can’t invest. However, somebody should have the reserves. So, keep that in mind.

Hope that helps!

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What do you think is an appropriate amount of reserves to put aside as a real estate investor?

Comment below.

Brandon Turner is an active real estate investor, entrepreneur, writer, and co-host of the BiggerPockets Podcast. He is a nationally recognized leader in the real estate education space and has tau...
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    Marcus Robert Investor from Worcester, Massachusetts
    Replied 4 months ago
    My opinion on this is that operating a business on a mo they basis requires more than the mortgage payment. If I was to have a completely vacant building and was in need of repairs, CAPEX, as well as having to pay some or all of the utilities for at least 3 months, could I absorb the cost? To make an easy number, I say that if my gross rents are 4000 per month (yes this includes cashflow because sometime we have to eat Cashflow to get back on our feet), then I need 12000 to satisfy 3 months of reserves. I also include this amount (12000) in my cash on cash return figure when making a purchase (in addition to down payment and closing costs).
    Shiloh Lundahl Rental Property Investor from Gilbert, AZ
    Replied 4 months ago
    Awesome article! The whole Covid-19, end of humanity scare, really caused me to take a look at our sustainability if everything were to fall apart. And I realized that we weren’t in a great financial position with regards to our cash reserves. We had been in a growth phase for the last few years and we were using our cash flow to reinvest and purchase more properties. At the end of the month our accounts started to look low and we dropped below our minimum cash reserve amounts (according to some of our portfolio loan covenants) often which would cause my banker to get frustrated with us. But my attitude was often, “what’s the big deal? I just bought 4 properties under market value and our net worth just went up by 100k. Relax. I know what I’m doing.” But then came the virus. And all of a sudden there were talks on the forums of the possibility of the majority of renters not paying any rent. With a little bit of math I come to realize that if that were to happen we could only sustain all of our personal and business costs for 2 months. It was like I was cruising down the road in a brand new Tesla and life was feeling smooth when suddenly all four tires popped at 70 miles per hour and I recognized that everything could change in an instant. Over the last three months, we have intentionally slowed our growth, sold a few properties, and focused on building up our cash reserves. I’m happy to say by the end of June we should have 6 months of cash reserves in case anything were to happen. Then we will decide what our next best growth strategy will be through the end of the pandemic.
    Eli Geneus
    Replied 3 months ago
    Man to hear that come from a seasoned investor is the truth that be lacking sometimes. As a newbie sometimes you get overwhelmed to just do any deal but to hear your story (takes courage and guts) makes me realize that this is a marathon and not a sprint. Thank you for sharing that
    Barry H. Investor from Scottsdale, AZ
    Replied 4 months ago
    As a Seller-Financer / Private Lender, I am the bank and I agree with your parameters. 6 months of loan + holding costs is my rule of thumb.
    Jerome Kaidor Investor from Hayward, California
    Replied 4 months ago
    I applied for - and received - an SBA EIDL ( Economic Injury Disaster Loan ). I already had the reserves recommended in this article. My plan is to salt away the EIDL money in an interest bearing account until the COVID-19 crisis is over, and then give it back.
    Michael Snowden
    Replied 4 months ago
    Agree with the article. I will only add that Cap Ex needs to definitely play into your numbers. I only own single family properties currently and have had a couple of instances where I had to handle two major repairs simultaneously (a new roof and a new HVAC). Also factor in what your insurance deductibles are for possible damage and/or major event. What can happen, will. It never hurts to be a little robust on your reserves. Your ability to quickly respond to incidences directly reflects on your ability to keep good renters and minimize vacancy.
    Jacquelyn West from Fort Worth, Texas
    Replied 4 months ago
    At least 100,000.00 for multiple units
    John Merrill New to Real Estate from Central Massachusetts
    Replied 4 months ago
    As somebody that is brand new to REI I found this article to be something that isn’t discussed often in most of the books I have been reading. I feel like this is a critical component in order to minimize risks long term. Thank you for the article in the discussion
    Paul Marthaler
    Replied 4 months ago
    I hate having 6 months of cash on hand earning 1/2% -1%. Instead, for the last 12 years I have focused on pre-paying mortgages in advance. As of now, I'm at 3 month's prepaid but goal is about 3-4 months prepaid. This enables me to maintain a cushion for several months in case things go south for awhile and take advantage of a little extra buy down on principle which will add up over life of what will become a shorter loan. Major Cap expense, I have income from the portfolio to cover it.
    Timothy Smith Investor from Buffalo, NY
    Replied 3 months ago
    Curious how you all define "reserves". Does it sit in an account earmarked specifically as cash reserves, or lie in a LOC (home or commercial), or personal savings/retirement vehicles? When I think reserves, I think about money I can access quickly, and does't necessarily need to be sitting in a checking or savings account. What say you all?
    Alex Jagoe Investor from Owensboro, KY
    Replied 3 months ago
    I have always kept 6 months' total expenses as cash in business checking for my rental company and my business I earn my income from. I have two rental units though -- if that 6 months gets up in the $25-50k range, I would be very tempted to put it into an index fund in its own account.
    Geoff Harris Contractor from Bend, OR
    Replied 3 months ago
    Great topic and excellent discussion. Reserves make a big difference in a pinch -- we're replacing most of a roof on a BRRRR right now. I've kept both cash on hand and LOC room to maximize flexibility. Example: $4,000 roof paid to the LOC and then paid off quickly with cashflow to keep more cash on hand, in case a second (or 3rd!) CAPEX re repair shows up there or at another property. Most of us on the forum are not trying to live off the cash flow right now, and this is a good reminder to keep the money in the bank. We'll be happy in the long run.
    Account Closed
    Replied 3 months ago
    Please advise I have several rentals and would like to get them out of my name and under a business name. What would be the most cost effective way to go about accomplishing this task?