How Much in Reserve to Start Out

Question

I am taking a $240,000 inheritance and purchasing properties in the next several months.  How much of that should I hold in reserve? Some of the properties may not yet have renters.  The area, though, has fairly strong rental demand.  What initial or early expenses should I anticipate within the first months of purchase (assuming I do all rehab at the time of purchase, so that they are rent-ready).  What's a safe reserve?

Alfred Litton · Answer

Since I'm paying cash and will have no mortgages, sounds like about 6-9 months gross rent should cover it, I guess.

Andrew Kerr · Answer

Hi @Alfred Litton, congrats on the windfall and planning to use to for investing vs blowing it!

If you are going to leverage it and get any financing, traditional  lenders like to see 6 months PITI in the bank for each property.

When I acquire a property I plan to finish in the first 6 months any costs to rehab or improve the property. I also plan to have extra maintenance costs. I found when buying property a lot of the time in the first couple months I will take care of any deferred maintenance issues and do preventative maintenance as well. Things like get HVAC units serviced, check all the plumbing for running toilets or dripping sinks, add CFL bulbs to common areas, etc.

What might be safe is to invest $200k, then save $40k. Then after 6 months or so when all the properties are stabilized, maybe lower that amount a bit if everything is running smoothly.

A lot of it will also depend on what type of capex I expect coming up. As an example, if I know I need to replace a roof in 2-3 years, I will make sure my starting reserve for that property is a lot higher.