Right now I have a few properties and I am putting offers on more. Luckily I don't need the income from the rental properties to live off of yet so what I've been doing is channeling all the funds after PITI and management (and charged maintenance for that month) into separate accounts for each property. My question then, is there a good time to stop doing that? For instance, if I stashed away 10% of the property value or a certain fixed amount in the account, can I then start diverting funds to a general account and snowballing the excess funds onto individual properties or as personal income? I understand all our models account for the various expenses ,capex, vacancies, etc. but they usually run in perpetuity to put away a certain amount every month. At what point does the BP community feel it is appropriate to not do this (aka what size safety net) where we no longer have to worry about the monthly flows for an individual property? I understand it may be personal risk tolerance preferences, but if there is a general consensus or rule of thumb that would help. Thanks
I am not an experienced investor, and just wading in but do now have two vacation rental properties that I am starting with and considering similar issues. One thought is loan payoff, but keeping home equity in reserve for emergencies. That way you can calculate what you need for ongoing expenses and repairs, but not have to keep it in cash reserve all the time.
If you have a mortgage, you should keep 20% - 30% in cash reserves for hard times. Why? Fire, expensive turn-over, vacancies, fines, etc. Also, it would be wise to get some credit lines just to have in case as well. Use it a little, then pay it off so it shows there's some activity. Some may say that's a bit aggressive, but if you have a couple of months of vacancies or more, you'll need those reserves to hold you over. I like to keep 10k for reserves per building. Keep in mind, our properties are in the Northeast, Philly and Chicago. Props. are a bit more expensive in some of these areas. So adjust accordingly. You don't want to be caught with your financial pants down when it's time to pay the piper.
This is a great question! I am excited to see everyone's input on this.
My first question though is--how much are the properties worth? For example, if the property is only worth $50,000, you would probably want more than 10% in reserves...
I think the answer depends more on how many properties you own than anything else. If you have 10+ properties then having 10% of the value in the bank on all of them is a huge amount in reserve that isn't being used in the best way. If you don't care about growing anymore or getting the most returns possible, then it is fine to leave it just in case every one of them has an issue at the same time. After that, as someone already stated, is how much they're worth. $5k in reserve isn't enough even on a cheap property. If you have a couple properties I would personally feel comfortable thinking what the worst case scenario is for an emergency expenditure? Are the properties insured properly? If they burn to the ground but the value is only enough to rebuild 2/3 of the property then you need more in reserves. If everything is covered and worst case is a new septic/roof/etc then I would have enough in there for the two most expensive worst case scenarios for each. If you have a bunch of properties then obv it would be overkill to have that much sitting there, but I think how much is needed after that is mostly personal preference and how risk adverse you are. If you have equity in the properties then it would also help to have open HELOCs on them just in case so you can use the capital for other things. Enough of my rambling, you get the idea ;-)