How much to keep in reserves for first property?

Question

Hi All,

I close on my first investment property in three weeks, and I'm wondering if it's common to inject a certain amount of reserves in the property's bank account right off the bat. Purchase price is $122,000 and rent will be $1450, and I was anticipating keeping 6 months of PITI as a starter cushion, and then build on that as rent checks start coming in.

For all future properties, I'd like to consider 6 months of PITI as being part of my initial investment/cash needed at closing. Please let me know what your common practice is! In the same vein, is there a point where you stop building a property's reserves and start allocating those monthly funds elsewhere?

Carol Zeroual · Answer

Brandon Turner shares a formula regarding rentals. He owns alot of rental properties and has done a few webinars on the subject. If I were you, I would listen to some of his webinars about the subject. He is very successful at it. Brandon Turner has also authored some books on the subject.

Matt K. · Answer

Basically, but I went and bought a higher end home that was already in good condition.

Let's get generic for ease of understanding...If you've bought a rehab house with new roof then you probably should expect your maintenance cost to be lower. You've likely paid a premium for the new work and while it will need to be recaptured, will you still own the home then? If you have a 30 yr roof and plan on selling in 10 yrs, then do you really need to set aside money for a new one?

Now let's swap it and say you bought a older house that wasn't in that great condition. It came w/ tenant in place, but it was older. Then you should increase your reserves and plan to spend when you have a vacancy. It's unlikely that a generic % rule will work because the rougher condition of the property. However, the lower price should increase your cash flow because again you already factored this in when you made the offer....

Not saying things won't/can't break outside of their intended lifespan, but things can also last longer. I budget to cover my expected worse case vacancy and cover routine maintenance. I leave the unexpected big things for a credit card. The more doors you get the more these costs average out, that's why so many people preach multifamily.

Matt K. · Answer

I take a look at my property and go based on it's condition, but also my estimated time of ownership. Everything has a life span and depending on the condition of each item you can come up w/ what makes sense. I run a little lean in the actual cash side, but I offset that w/ available credit. I think the 6 months is a good start, but the real question is how would you replace x if it went out tomorrow. Maybe your answer is interest free credit card for y months... or HELOC... or cash in the bank. All do the same thing just different way to get there.