Cash needed for first rental?

9 Replies

Hello all, I’m just starting out and want to get into rental properties and my question is how much money do you recommend having in savings when starting out? I don’t want to buy my first property only to find out some major expense pops up and I don’t have the savings to cover it. I’m looking at a duplex to fourplex for my first property and just want to make sure I have enough of a safety net before I jump in. Thanks!

I just bought my first duplex, I was advised by @JD Martin to have at least 10k in reserves. Im glad I took his advice, because immediately I had to deal with some unexpected costs. Renovation is about 1k more then I had anticipated (which isn't bad). But I will also have the month of October vacant in one unit. 

The two weeks leading up to the closing, I was hit with some unexpected costs with my dog where he needed surgery. So that cost me about $1500. I was always concerned about having reserves for the house I was buying, but completely disregarded reserves for life outside of RE. Now I know why it is so important, because I may have been in trouble if I didn't take those extra steps to save more. 

@Joshua Ferguson

    As a rule of thumb I like to have $5K a door in reserves. You'd be surprised at how quickly that can go in one bad month. I do know some investors that feel comfortable with having $1,500-2,500 in reserves. Starting out I'd recommend having more. Once you have a rental for a while and have made some repairs you should have a better idea of what to expect in terms of repairs. At that point you can decide if you can risk having a little less one or two months if going for that next property. Hope that helps!

 - Mike

There is no such thing as having too much saved up, that's what will create opportunities for you. 

Set a price point with keeping the reserves number set in mind, I wouldn't compromise too much. I wanted the duplex for 240k (with 10k in reserves) and I settled at $242500. It was listed for 260k, but I was firm on my price. At the end of the day I compromised a total of $625 out of my reserves for the down payment. And the numbers still looked great. Anything more than $242500 I would have walked.

Yep, I like @Brian Ellis advice of $10k.  I am good with 5% of PP here for reserves, but am afraid to say that if you are buying OH $40k places.  $2k would not be enough.  A roof or major mechanical replacement is not all the sudden less because the property costs less, so the % marker gets majorly skewed.

When you inspect the actual property you will have a better idea of what to have set aside for Cap Ex and other reserves like repairs and vacancy.  

Originally posted by @Brian Ellis :

I try and follow you @Steve Vaughan I might have to pick your brain on how to save more! Im already becoming a bit of a minimalist 

 Thanks, Brian.

I save a lot on repairs and transactions, but not by being minimalist.  The reason I can save so much is because I have a large storage space in the back of one of my buildings (that my PM co rents from my bldg entity, of course) full of basically everything I need to keep me going.  I can literally not go to HD or Lowe's for years except for new larger scale rehabs.  Far from minimalist but I like where you're heading!  

You may also want to consider having more in reserves for the fourplex than you would with the duplex. During the property showing, take notes on what needs repair/rehabbing since this would affect your reserve amounts.

Thanks for the shout-out @Brian Ellis

Keep in mind that reserves doesn't necessarily have to be cash on hand. It can be access to low/no interest credit cards, a HELOC, a personal loan to yourself from a 401(k), a wealthy relative, etc. Cash is great but if you have healthy income you don't have to let the lack of a big bundle of bills stop you from getting started - you just need to know that if you ran into a problem, you could access the funds to take care of that problem, and you could pay those funds back in a controlled way without skipping your mortgage payments or having to go to a soup line for awhile.

When I first started I kept a pretty good chunk of cash on hand - I've always been a bit of a money hoarder anyway - but at some point when the business ran itself I didn't have to do that any more - and, in fact, just hanging on to cash at .005% interest was counterproductive to building wealth. I still have access to plenty of liquid assets, but I don't worry about keeping $X amount per door any more. Also, part of what you need depends on what you do with the places. Since I do full rehabs on our homes, my expenses going forward are pretty minimal and high-dollar emergencies just don't happen. I had to do a heating system this year on one house, but I knew that I would at some point in the future back when I bought it so I just assumed it as a budget item then. But if you put on a new roof, then you're unlikely to have that as a "surprise!" repair.