Cash to Equity Position
What is a typical cash position that you should maintain as a landlord to have for repairs, emergency expenses, buying opportunities, renovations, etc? I am looking to purchase my first rental property. I know what I can afford, but I am unclear how much of a cash position I should maintain after the purchase. Does $20,000 sound like that is enough? 10K?
Regarding repairs and emergency expenses -- that would depend on the condition of the property. A rough guideline would be to reserve less if your property is newer and in great condition, and more if your property is older and the previous owner didn't take as good care of it.
Definitely check the BiggerPockets Rental Property calculator (Tools -> Rental Property) -- it not only does the calculations for you, it also provides explanations for what each input item is. Sounds like you'd want to focus on better understanding CapEx, reno/repairs/maintenance, and vacancy reserves.
Hope this helps!
*Tayo
Quote from @Tayo Black:
Regarding repairs and emergency expenses -- that would depend on the condition of the property. A rough guideline would be to reserve less if your property is newer and in great condition, and more if your property is older and the previous owner didn't take as good care of it.
Definitely check the BiggerPockets Rental Property calculator (Tools -> Rental Property) -- it not only does the calculations for you, it also provides explanations for what each input item is. Sounds like you'd want to focus on better understanding CapEx, reno/repairs/maintenance, and vacancy reserves.
Hope this helps!
*Tayo
Agreed here
I would consider the amount you need for repairs and emergency expenses to be mentally separate from the amount you are holding onto for discretionary renovations or buying opportunities, even if you hold the actual cash in the same account.
To add to what has been said about estimating the non-discretionary reserves, I would determine how much the "biggest ticket" items might cost you to get the idea. For example, how much would it cost to replace an HVAC system, replace an aging roof, replace a broken appliance, fix a sewer backup, cover the deductible on your insurance policy, turn over a unit and deal with an extended period of vacancy if you had to do them all in a single year? You'd obviously be very unlucky if all of those problems struck at the exact same time, but you will need to know where you'd get cash if multiple expensive problems strike in succession, before you have a chance to rebuild your reserves from the amount of gross rental income you're setting aside each month for capital expenditures, repairs and vacancy.
Quote from @James Lipko:
What is a typical cash position that you should maintain as a landlord to have for repairs, emergency expenses, buying opportunities, renovations, etc? I am looking to purchase my first rental property. I know what I can afford, but I am unclear how much of a cash position I should maintain after the purchase. Does $20,000 sound like that is enough? 10K?
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.
