How much in reserves would I need if I want to buy 20 houses at once with mortgages?

Question

I'm wanting to 1031 exchange my one property into 20 different houses in a low cost state. If each house costs around 80k and I get a mortgage for 80%, how much would I need to have in reserves? How much would you recommend?

Lien Vuong · Answer

You'll need to account for 25% down payment for these as you'll have to go commercial because of the amount of doors which lands you at $400k with reserves and closing costs, you'll likely end up closer to $500k liquidity to execute this plan.

Nathan Gesner · Answer

There's no right answer or set amount. 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.

Ernesto Garcia · Answer

Yes, it is a good amount of cash. The reason why I say $550k is because of the problems you may inherit when buying 20 different homes. If you are purchasing 20 homes at 80k each that is a $1.6m portfolio. 20% is $320k. The mortgage will be a couple of points + closing cost. Say you are all in at $350-$360k. $150k-200k is a safe nest egg that can cover anything inspections may have missed. Keep in mind it's 20 different SFRs.

Ellie Narie · Answer

Hmm, that does seem like a lot. I thought it would just be something like 6 months of mortgage payments? How do other investors get huge portfolios of houses?

Ernesto Garcia · Answer

At least 550k. each of the individual homes must be in pristine condition because repairs and unaccounted property expenses are the number cashflow killers for investors. Minor repairs here and there times 20 will add up quickly!

How much in reserves would I need if I want to buy 20 houses at once with mortgages?

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