We're learning the importance of reserve funds right now and in the coming months.
In terms of months (I don't need to know your exact dollar amount) how much do you have in reserves?
I'm talking every expense for your property for the entire, regular month. Mortgage, taxes, insurance, utilities (even if they're normally paid for by the tenant), lawn care, maintenance - anything coming out of your pocket for the property.
I think we can leave out capex and vacancy for this discussion, I'm interested in fixed or fairly fixed payments you'd need to make if your tenant could not.
Even before purchasing a property, I personally have 6 months of reserve expenses set aside. Real Estate investing is not my full time job, therefore, making sure that I can cover expenses in the event of unforeseen "disasters", like COVID, is essential. Perfect example, we just closed on a 4plex last week that needs rehab and as there is new management, may result in potentially a turnover of tenants. Having these reserves set aside allows me to have a buffer for the unforeseen.
I have 23 tenants in a combination of SFHs, six unit, two flats, condos etc. I have about 8 months of total rental properties related expenses in a cash account. I can manage well for eight months with none of the tenants paying any rent. Reserve is essential even with W2 jobs once you keep buying properties and your property related expenses exceed $20000. We have W2 jobs for our own mortgage/expenses/savings etc. Also I have some properties that are paid off. I always realize importance of safety net especially being in Cook County being tenant friendly, and very high RE taxes. My properties are generally in B class or above. Majority of tenants are working from their homes.
For cash on hand, about 6-8 months. That’s if I collect zero rents. And then another 12-16 months in a Vanguard brokerage account that is easily accessible (but that is also susceptible to the volatility of the stock market).
Now, that being said, I was (am?) planning on purchasing another property if the right deal comes along. But I am hoarding more cash, starting this month, than I usually do. I do not like my cash sitting and doing nothing, but right now “nothing” is better than the negative that my 401k is generating.
And I also have that solid W-2 job to back up my entire plan.
Great job on that buffer. It makes those “tough” decisions turn into logical business decisions.
@Anthony Wick I agree completely! And great point about having other "reserves" not specifically tied to the property, but easily accessible if needed. This has been a moment in time where I'm very thankful to have a solid W-2 job to support.
Good afternoon thank you for the great post! out of curiosity how do you calculate how much reserve you should have? and what expenses should you consider in this calculation?
Thank you in advance!!
6-8 months if all paid out of cash on hand. More if you count IRA funds. Odds of no income across several properties is unlikely, so that money should last quite a bit longer.
8 months cash on hand if none of my tenants pay anything. Another 12 months if I wipe out my personal savings. Up to 20 months unless there’s a serious big ticket item like a furnace sewer line.
We usually have a fairly healthy reserve which is essentially our set asides for maintenance, capex and so forth. Just prior to this virus debacle we spent all those reserves buying additional properties. Instead of taking out a mortgage on one of our properties, we borrowed internal funds. So we emptied "buckets" of money that we usually leave undisturbed. We then show this as internal debt and pay it off a little each month until everything is back how it was or should be. So we now have two additional paid for properties as they were a cash purchase but our reserves are nearly zero. We do have an untapped HELOC and some other family funds we could get access to. We can go two months right now with no rent income and if we get half the rents we could go a long time. We have no W2 or pension income, we live off of our rental income and work at it full time. (renovating properties, etc)
I am very fortunate to have retired from my government job in December and left only 1% of my accessible savings in the stock market (just for the fun of it). I have started working on two buckets. First bucket is a self-directed IRA containing 4 FTD's, one all cash property and one leveraged, which is under contract at the moment. I am hunting for a second leveraged property in there as well. Second bucket is cash available outside of the SDIRA, where I have one property under contract that will be leveraged as well. I am looking for two more leveraged properties in that bucket alsol. All in all, I am still cash heavy in my young real estate investing life.
Once all properties are attained in both buckets, I will still have a solid amount of reserves. Not factoring a potential large repair cost, which shouldn't happen since the properties were fully rehabbed, I estimate to have 60 months of reserves at that moment. Doing these calculations I see that's a lot and I might consider trying to squeeze another property into the mix. Will have to cross that bridge once I get there.
Currently, I think I am in a very good place to wait and see what is the best course of action
Normally about 4 months I keep in the operating account at all times. Excess goes to my personal savings. I just sold off a few properties and those profits are just sitting in savings
Average of around 6-9 months of cash across properties and asset classes.
I am well over 18 months . if every tenant stops paying on 6 units and I dont work at all
I will be curious if people that are strapped will respond. While this is a great reminder to have reserves, we must remember to support those that are just starting out, like we once did. I certainly didn’t always have months and months of reserves, and the idea of 50% vacancy or tenants not paying would have been quite nerve racking.
So, if you don’t have months of reserves, you can still get through the hard times! Things like self managing and YouTube fixit videos are your friends!
I think about this and how my leverage and risk changes with every rental I buy. I have 10 rentals and could pay mortgages for over a year with real estate only account reserves if no one pays me rent. Several years I guess with all cash accounts. I also factor in some anticipated maintenance like a roof I'll need soon for one of them and some HVAC work on others. As far as personal risk, my wife and I both have day jobs, and have always had the strategy of controlling living expenses so all expenses can be paid by only one of our salaries. It's worked out well and I want to add 10 more rentals by the end of the year. Hopefully the market cooperates!
We have reserved enough for each property for up to eight months even if no one pays. We have 2 paid off and 3 with a low-rate mortgage. We just cash out some money at a low-interest rate from one of the paid-off properties and have enough cash to buffer for another 12 months if things are going really bad. So far we only heard from one couple that have difficulty coming up with a full-month for April, but we have their 2-month rent in hand, security deposit and the last-month. We are working on a plan with them to keep them sheltered. Plus my husband still has his W2 job, working from home, and I have made some deals from the past 3 months, waiting for my checks to come in in the next 1-2 months.
Wasnt sure until I saw this thread and did the calc with all of my liquid assets. 20 months! For one duplex and a W2 job. Means I need to acquire more properties.
If every house went vacant I have about 3 years of reserves. However, I have a "regular job" that pays enough to cover all my bills and all of my expenses on the rentals. And I have a couple of "side hustles" in my teaching jobs that would provide some extra money beyond all of that. So in theory I have infinite reserves, unless I were to lose all my income sources at once. Considering I work in public utilities I have a fairly recession proof job.
If there has been one constant in my life, it has been the concept of risk management. You think about the Richest Man in Babylon, one of the primary ideas is "protect thy gold."
You need to include vacancy as well since reserves are meant for that too. With that said there is no hard and fast rule. I woukd think you would need at least 2 months rent for each unit. This DOES NOT mean you need to have that siiting in your bank. Just means you have access to it or can fund easily.
If you have multple cash flowing units assumption is you can use your scale to offset missed rents, etc.. and your reserves could be lower.
I never thought about extreme circumstances like pandemic and times where almost everyone is affected. So reserves were based on pre Corona. Obv things changed
Some of mine is in a retirement trust that's sitting on about 15 months of reserves if no rent came in. The rest I own directly and have around a year of reserves.
@Mindy Jensen my calculation has evolved over the past year as I’ve focused on this quite a bit. My reserves are based on the conservative case that in a tragic market I may need to reduce rents as much as 50% to gain a steady renter. Or phrased another way, I’m planning for 50% vacancy relative to my current rents.
I think it's better to work in numbers. Between 3 SFH I have a PITIA of $5550. So in my planning model I use 50% of that to calc my reserves. I like to aim for 12-18 months.
In my case I’m comfortable carrying a min of $33,300 in reserves. I’m in Phoenix where net migration and employment have been booming. If I see a 50% reduction in rents it’s because we’ve reached peak catastrophe... In which case I’m more worried about the solvency of our country than I am my own bankroll.
@Mindy Jensen If nobody paid I would need 150k/year to cover expenses. I can cover that from accumulated rents from property accounts. I am fortunate and don't have any mortgages to pay at this time.
6-8 months in general, but more like 12 after a sale in Jan.
Dipping into the opportunity fund? Years. Good discussion!
@Mindy Jensen Today's global situation is the perfect example of having a couple of months worth of reserve for emergencies. We hope that day never comes but what we are experiencing goes to show it is better to be safe than sorry.
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