How much to keep in reserves

5 Replies

Hello BP,

I am looking for my first rental property and was wondering what people keep in reserve for a deal.  Since it will be my first property I will be able to get it for 5% down, which will only be about $8K, there are closing costs as well but I have the money for that.  Although I have the money for purchasing and the repairs up front, what kind of money should I keep in reserve for after the deal?  

Here is what I am looking at:

Purchase Price: 150-185K Duplex with Garage.

Area Rent: 1000-1200 per unit

Downpayment/Closing Costs: 8-9K

Mortgage Payment(Includes taxes, P&I, home insurance and PMI): 900-1100 per month

Initial Repairs: 2k

Left over Cash: 7K

My thought is to purchase as an "Owner Occupied" (that's how I would get the 5% down).  It is 2 hours north of where I am currently living.  I will be in that area anyway because I have family up there, but I would do the repairs need on the weekends and then as soon as possible get both units rented out.  I figure it will take me approximately 3 months only working on the weekends to get one unit ready.  Ideally the property will have one unit that is in livable conditions so I could get that rented out right after purchase and then update the other unit.  I will continue to rent where I am now and this would end up being purely an investment property.  What kind of reserves would people recommend to have for a first deal?

Thanks for your help!

Some of it will depend on how old the property is. The older it is, the more problems seem to "pop up". I would try and keep at least $5000 on hand just in case something like a furnace decides to crap out on you or a tenant floods a unit and you need to repair that.

When I bought my first properties, all cash, I kept $10k per property in reserves. But that was on houses that I fully rehabbed. I felt like that covered most contingencies, especially since I didn't have any mortgages. Once I got more houses I didn't bother to break it down that way any more. In this case, where you don't sound like you're doing a full rehab and you'll have a full mortgage, I would probably do 20k or more. 

How are you doing 5% down? FHA? There is a residency requirement if you're going FHA, and you don't want to be caught not living on the premises.

Thanks for bringing that up.  When I spoke with my bank, I told them I was looking at a duplex as rental property and they said 5% was the minimum.  I am checking with them to see if that is for an owner occupied and what their requirements are.

@Jared Baker , that is owner occupied, if you don't intend to live there, that would be mortgage fraud. Since you don't intend to live there, you'd be looking at likely 25% down and a premium on your interest rate, which will likely kill this deal. A couple thoughts- why wouldn't you live there for a year and take advantage of the benefits you mentioned above? If this is your first deal, it seems to me like it's not a GREAT deal, assuming you are banking on cash flow to some extent, and you probably should.