Curious about something. Most of us have heard about the 50% rule, or saving a % of gross rents for things like repairs, capex, PM, vacancies, etc. At what point do you determine you have enough cash saved up? Having a big wad of cash in a bank account certainly provides a level of security, but it doesn't have a great return.
Assuming one does not touch what has been saved, is there a threshold where you start funding other areas with a stronger ROI (buying new properties, paying down mortgages, investing in the stock market, etc.).
I realize this would be different for someone who owns 5 properties vs. someone who owns 100, or someone who owns rehabbed properties vs. someone who owns properties that will need a lot of work, but I'm interested in everyones thoughts on the subject.
I've been very blessed to grow from 0 to 13 properties (mostly all rehabbed) this past year and plan to continue to grow very quickly, but, I want to make sure I'm doing it strategically, and intelligently!
@CJ M. My goal is to keep enough cash reserves to cover ~6 months of mortgage. At this time, I only have 1 rental property so I want to make sure I keep solid cash reserves in case of unexpected vacancies or large unplanned expenses. As you said, this ties heavily into a person's risk tolerance and goals. I should also specify that for now I think of cash reserves as an "emergency fund" for the property, so I count this separately from the money I set aside for repairs/cap ex. I am taking a more conservative approach, but with a young family and only 1 investment property I want to make sure I keep myself in a strong position to handle unexpected setbacks until I gain enough assets to give me more flexibility.
Thank you Scott. Makes sense!
It all depends on what you have in outstanding loans on your 13 properties. I go with 8 months PITI (principal interest taxes insurance) for your total outstanding debt. This should be your reserves for your portfolio.
I have 2 separate real estate accounts. 1 is my purchase fund. When that account gets large enough for my next purchase I know I am ready to buy another. I also have a just in case of an emergency fund.
The more savings the better. You never know what opportunity might present itself or a market turn.
Thank you Frank. All my loans are recent as I just got into REI this past year...but it sounds like I'm on the same page as you!
I think it depends on your risk tolerance. The biggest thing is you have access to funds for repairs and unexpected costs. That can mean things other than cash: line of credit, credit card, etc. If you don't use cash, make sure the debt is paid off quickly.
Personally, I like to keep eight months of PITI per house. My houses are in the 40-70K range with traditional 20% down 30yr amortization loans.
Eight months worth of reserve is usually enough buffer if I’m in a pinch. Mind you I’m not a major player with large amounts of units. Bigger players most likely will have a different philosophy. Real estate is so niche and situational. Best of luck!
Definitely depends on how many REI properties you have. This is the way I calculate my reserves for properties I have owned for more than 5 years.
For less than 6 properties, I estimate my big item expenses (roof, water heater, paint, carpet or floors) taking consideration the age of each times that commonly required replacement. I have these expenses/costs (CapEX) already included in my rent, so that does not count towards additional reserves! I like to have an additional reserve of 15% of my calculated CapEx, but ideally shooting for 20% of the overall costs. I think unexpected things happens, and we have to be prepared to absorbed the cost and keep the business alive.
Maybe I’m going to get kicked for this. But the more cash reserves you can budget out the better! Especially budgeting out without jeopardizing your property operations/business growth.
I know the recommend minimum thresholds, but I personally do not think there is too much.
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