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Matt Sora
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How much should you have in Reserves???

Matt Sora
Posted Nov 30 2022, 09:30

How much money should I keep aside as a reserve for my Properties? I know it all depends on how much you have but if I'm just starting with like a four-plex, what is a good rule of thumb before I start taking money for myself? I'm going to keep reinvesting the cash I make until I get a good reserve. Thank you!!

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Charles Carillo
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Charles Carillo
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Replied Nov 30 2022, 12:36

@Matt Sora

If the property is in good shape, with no deferred maintenance; I would probably start with $250-$350/unit and you can add to it every month. Keep it in a separate savings account. Every month when rent is paid; you can move a portion into that account. When you purchase additional small properties; you can do the same. Keep one savings account and add to it monthly to build a reserve. If you see CAPEX items on the horizon; I would increase your monthly deposit into this account.

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Caleb Brown
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Caleb Brown
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Replied Nov 30 2022, 12:38

At least 10K. With a 4plex probably more(15-20K). This will also depend on what market you are in and cost of the property. If 2 HVAC's go out at 1 time that'll eat up a lot. At the start you are getting the property stabilized and getting systems in place, there will be things that go wrong. 

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Bob Stevens
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Bob Stevens
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Replied Nov 30 2022, 12:42
Quote from @Matt Sora:

How much money should I keep aside as a reserve for my Properties? I know it all depends on how much you have but if I'm just starting with like a four-plex, what is a good rule of thumb before I start taking money for myself? I'm going to keep reinvesting the cash I make until I get a good reserve. Thank you!!

 Depends, if fully rehabbed newer everything then just leave a few hundred per unit. If its older and you suspect repairs, then leave more. Also, if its in NY for example then you will need more if its in say OH. A furnace replacement in OH is about 1800 NY more than double, or triple. HW tank 1k in OH vs 3k NY. i am sure you get my point ,

Good luck 

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Nathan Gesner
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Nathan Gesner
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ModeratorReplied Dec 1 2022, 03:34

This is not an exact science. It depends on your financial strength, the quality of the property, how many properties you own, etc.

I like to start with one major expense and three months of vacancy. Imagine if you had one single-family home. The tenant fails to pay their last month's rent and leaves the place needing new flooring and paint. It will take two months to turn it around and get it rented. That's three months of mortgage and utilities, the cost of flooring, and the cost of painting. That's a pretty common scenario and could cost you $10,000 - $15,000 so that would be a good starting point for your reserve.

But there's more!

What if you're a cardiologist with no debt and making $250,000 a year? You could probably afford $20,000 without much impact on your personal budget. If you're a single mom with student loans, a car payment, and living paycheck-to-paycheck, then $20,000 would be devastating and a reserve is critical.

What if you have an apartment complex with 20 units? Do you save three months of vacancy for each unit and $50,000 for the roof replacement? That would be around $90,000 sitting in a savings account! At this point, I would recommend having a line of credit to cover these things so you don't have money sitting in the bank doing nothing when it could be put to work.

I have 33 units, no debt except for mortgages, and excellent income. I can pay for all my problems using the cashflow from my current rentals. I also have a $175,000 line of credit at the ready if something catastrophic happened. A reserve is unnecessary, but I still keep around $15,000 - $20,000 in my account.

The point is, you should sit down and assess your personal finances to determine what the worst-case scenario may look like, how much you would need to cover it without impacting your life, and whether you will need to build a reserve.

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John Morgan
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John Morgan
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Replied Dec 1 2022, 05:38

@Matt Sora

I would keep at least 10-15k in reserves. But have access to much more just in case. My credit union gave me a random consumer line of credit up to 25k I can have on a moments notice is ever needed. And Citi credit card gives me those convenience checks with up to 25k with 0% interest for a year I’ve used several times when needed. So my comfort level with 17 properties is 25k for reserves in savings.

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Larry Turowski
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Larry Turowski
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Replied Dec 1 2022, 07:50

@Matt Sora you’ve got some excellent responses here, especially by @Nathan Gesner. As a rule of thumb, the fewer units you have, the more you need and reserve per unit.

Think of reserves as being self insured. And Insurance is about probability. If you have one rental, a single family home, there may be a low probability that you’ll need to dip into reserves to cover non-payment or major repair on any given month, but obviously a 100% probability that if you do it affects all of your rentals, that is, your one rental. If you have 45 units, like I do, there is a high probability that I’m going to have to cover some non-payment or major repair expense every month, but it is highly unlikely that that is going to be true for all my properties, let alone more than 2.

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Leo R.
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Leo R.
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Replied Dec 1 2022, 08:19

@Matt Sora  what @Nathan Gesner said 100%

It also depends on how many total units you have, and their performance. For instance, if you have only one unit, and it goes vacant--that could be pretty catastrophic if it has a big mortgage payment & utilities and it's not bringing in any rent. On the other hand, if you have 10 units, and one goes vacant, then the other 9 can potentially cover that vacancy (if they're performing well).

In addition to the condition of the property, also think about how many breakable items the property/properties have. For instance, if a quadplex has 4 AC condensers, that's a lot more breakable stuff than a quadplex with no AC (or a single fam house with 1 AC).  ...4 single fam houses is 4 roofs that will eventually need to replaced, but a quadplex might only have 1 roof. A duplex with two water heaters is more liability vs. a duplex with one water heater ...etc., etc.

Also, think about the quality of the breakable items, and the expense to replace those items with things of equal quality...for instance, is the HVAC a fairly standard forced air system, or is it a super high-tech, high-end system with radiant floors, etc.? Is the fridge a low-end unit you can find at any home depot for a few hundred bucks, or is it a luxury sub-zero unit worth 15k+? Are the windows just regular, standard-size windows, or are they huge, multi-story, custom made units? etc., etc....all these factors impact how much repair/replacement costs will be, and therefore how much money you need in reserve...

Also, think about the grade of property & neighborhood, and what types of tenants that will attract--and how those tenants will treat the property. For instance, if you're renting to 18 yr old party animal college kids, your repair & turnover expenses will likely be a lot higher than if you're renting to mature, 35 yr old, high-income professionals. If you're renting to young adults who are transient, you'll probably have a lot more turnover than if you're renting to people in their 50s & 60s, etc., etc.

As others have mentioned, it's also common practice to have open lines of credit ready for emergencies. 

Personally, I have mostly B and A class single family and small mutli fam properties with pretty well-qualified tenants, and I usually keep about 10-20k cash per property, plus an additional 35-50k of available credit per property.

Good luck out there!

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Nicole Heasley Beitenman
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Nicole Heasley Beitenman
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Replied Dec 1 2022, 08:33

My rule of thumb is $5k per unit.

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Simon Ashbaugh
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Simon Ashbaugh
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Replied Dec 1 2022, 08:40

Depends on the property and area, but, id start with 5-10k and throw $100/month/door in there till its at 20k or so

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Bud Gaffney
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Bud Gaffney
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Replied Dec 1 2022, 08:49

Exactly what Nathan said!