The importance of reserves

5 Replies

I just wanted to write a quick post to remind all investors of the importance of keeping some 'reserve' cash on hand. My quick story:

I am a buy and hold investor and I currently own 4 SFR's. I am in the acquisition/growth stage of my REI career, so I have a tendency to want to deploy all/most of my capital as quickly as it comes in to try to buy the next property. I wanted to share my experience to hopefully save another investor some major problems down the line.

In Q1, Q2, & Q3 of 2017, my average NET cash flow from 3 properties was between $2,800-$3,000 per quarter. Mind you, this is not accounting for cap ex, yada yada. This is ACTUAL net cash flow after all expenses and debt has been paid out. However, towards the middle of Q3, I added my 4th unit to the mix depleting most of my cash reserves. (Thankfully not all of them). Then the proverbial sh!t hit the fan. I will spare you the details, but a combination of necessary repairs, a unit going vacant for 4 months, and a tenant falling behind on rent wreaked havoc on my cash flow. I just tallied up the numbers and I finished off Q4 of 2017 with just $56 in net cash flow. Hardly exciting. Had it not been for the reserves I was holding onto, it could have been a very frustrating holiday season.

So if you are a new investor, don't forget to keep some cash on hand for when Murphy's Law comes into play! Hoping the best for you and yours in 2018!

I couldn't agree more.
At some point, the **** will hit the fan, it is just a matter of time.

Brace for impact!

I view Investing in rental properties as being similar to being a motorcycle rider. You have either had a accident or you will have an accident.

Rentals are the same....if you have not already had that rough patch (or many) you will have them in the future. Reserves are very important to survival when starting/growing.

@Drew Purvis What's interesting is that once you get enough units there is "always" something going wrong.  It could be minor or major but the "repair free" month is when the pest control guys come out for preventative maintenance, etc.  So it's a nice little mix of being a blessing and a curse.  Now that doesn't mean that a reroof won't feel like a gut-punch but that's a little more predictable.  And I still have a good ol' chunk of money in reserves... 

Wow, thank you @Drew Purvis for reminding us of this.  I have got to the point where am actually a little OCD about this, but that's just because I do not want to stress due to being caught off guard when **** hits the fan, which I know it will particularly considering the age of the property.  Still in good shape but I know in due time, I will need to repair some major items.  Just re-did the room on one of my properties, the HVAC systems, so that's good.  Plumbing, I know is going to be knocking on my door in a few years time so planning and prepping for this :)

And just to reiterate one more time...My property management company just called me this morning to inform me that I had a water heater fail and will cost about $800 to replace. This was expected, but comes at a very bad time. Thank goodness for reserves.

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