Financial Philosophy for First-Time Investment - Single Residential
Hi everyone,
I'm a full-time touring musician beginning my foray into investing - looking at high ROI markets in Metro Detroit (Excluding the city of Detroit itself) between 80 - 120K purchase price. I have a flexible lender, but thinking of doing minimum 20% down to avoid the PMI fee. Generally, I'm expecting, and am prepared to spend $30,000 between down payment and closing costs, which I can afford.
My question is: Given I plan to buy and hold rather than Fix and Flip or sell in a few years, what cash reserve do you think I should have to feel like I am prepared for the WORST case scenario (e.g., another recession, client vacancy of 6+ months, etc). Is $10,000 in reserve "enough"? I currently have a fully paid off house, and zero debt whatsoever.
That said, I'd hate to find myself in a position where I am struggling to financially support my mortgage payment in the event of vacancy / recession.
I'm stoked to start this process and have a solid grap of the fundamentals, but I want to make sure I'm prepared for when sh... hits the fan.
Thank you so much for your advice in advance.
Hey Jake, I can give some advice since I know the Detroit area extremely well. I own 12-doors in the actual city of Detroit and they've done phenomenally well for me.
I would highly recommend not excluding the city itself. That's where the biggest opportunity is today hands down. I'm happy to send you some resources about that if you'd like.
Regarding reserves, I'd say $10,000 is plenty for one home in the price range you're considering. It's probably more than enough.
The biggest ticket item would be having to replace the roof. If that's in good shape and you can guesstimate how many years it has left you can plan accordingly.
But ultimately reserves depend on your risk tolerance and predictability of income outside of real estate.
I keep maybe $20,000 in a checking account for family emergencies AND our real estate stuff. But we have $16,500 in gross rents that come in like clockwork each month with more than half of that net income after all expenses.
That means I have another $8,500/mo coming in as "reserves" if I needed them. And I find that more than covers any surprise expenses.
Hey Travis,
Thanks so much for the detailed response. I'd love to review any resources you have on the city of Detroit; my reservation has been that the level of violent crime - particularly, shootings - in many neighbourhoods (with the exception of downtown) seems counterproductive to rental stability, but I'm sure there are positives I've yet to consider!
That's a great point re: risk tolerance and predictability of income, and thanks for the context on the kind of reserve you keep on hand for family / real estate stuff.
Looking forward to hearing back from you... Appreciate it!
