Reserve money amounts in accounts?

Question

So we finally found our first deal on a SFH, (after numerous offers, refusals, Mo. searching, reading hundreds of forum posts ,etc) got it closed, got the rehab done, paying renter, and a nice bit of cash flow, Sweet! Retirement here we come!

Ok so we have some money left for the next investment and I go down to the bank( local credit union), and start discussing costs, Down, interest, closing, points, Reserve payments.. Reserve? where have I been? 6mo on the new property, 6mo on the investment property, 3mo on my personal residence. I realize that this is money I was going to put into the rehab. I talk to another bank and they are about the same. Now, I have read a lot of various forum posts and I never really saw this as an issue, but

What do you do when you have 5-6 + properties financed?

Do all the lenders hold to this?

Will they negotiate  the amount?

What else do I need to know about this?

Carl Giauque · Answer

Thanks for all the reply's,, It was just one of those things I wasn't planning on, one of the bankers I spoke with said that next year they were expecting to see higher down payments on the investment properties, possibly as much as 40%,(ouch) as the big lenders put pressure on the smaller lenders..who pass it on to us.

Steve Babiak · Answer

Here's a link explaining how to determine reserves:

http://www.biggerpockets.com/forums/432/topics/86771-fourplex-analysis-help?page=1#p533774

Matt Devincenzo · Answer

Haha yeah Robert it's been mentioned here, though not as often as some of the other things get mentioned. Here's a fun one for you, after your 4th mortgage the reserve requirements go up even more. (This is for govt backed loans go to page 3)https://www.fanniemae.com/content/announcement/0902.pdf

So a couple things you can look into, first is a commercial loan product aka portfolio loan, though they may very likely require reserves as well and the interest will be higher so probably not your preferred choice until your 10 govt backed loan "bullets" are used up.

The other is most times you can use retirement account balances like a 401K or IRA for the reserve amount. You don't have to actually withdraw the funds just show that they are there and that you could access them via loan or withdrawal if you needed them.

Hope this helps.

Elizabeth S. · Answer

I'm not familiar with that but I was talking to someone at work today who is getting ready to buy a different primary residence and they were saying that the bank was telling them the same stuff and that rules are going to be changing (maybe) at the beginning of 2014 to make bank loans more strict. This is all 3 hand knowledge though so could be totally off.

It's a great thing for them to hold you to. I also think that once you have more time in the game and experience they may not hold you to it. I just bought with commercial loans last month and they took me out to lunch, talked about my business and we were good to go. I had a help going into commercial though because I bought a few rentals on their personal side and that gentleman was a support of me to the commercial banker.

So the moral of my story is that reserves will SAVE your retirement and time will allow you to be smarter and make more risky choices because you have experience.

Christopher Leon · Answer

I believe this is pretty standard, Carl. When you have 5-6 financed deals its about time get with some private lenders or partner up with others to do more deals. Albeit, it is good business to have those reserves in place. Like @JeanBolger said above, "And I kinda wish someone had "forced" me to hold those reserves when I started out, it would have saved loads of stress." I'm with her 100%.

Jean Bolger · Answer

Those seem like reasonable reserve amounts to me. And I kinda wish someone had "forced" me to hold those reserves when I started out, it would have saved loads of stress.

I think most lenders would relax the amount per property they need to see as you progress, as long as you have a healthy amount set aside. You don't usually plan for every single property going to heck at exactly the same time.