I have a question. I am interested in purchasing a turnkey rental out of my market and I'm looking at providers in cashflowing markets. I wanted to know how much in a cash reserve is recommended on these types of properties? Basically, how much cash should I have on hand for emergencies. Is it a certain % of the purchase price?
Everyone will be different depending on how conservative and safe you want to play it. The smaller your cash reserves for each property, the higher the chance your investment will go bad if you do experience any hardship.
I personally like to keep about $3k per each of my turnkeys for emergency situations.
There is no exact formula or figure for this but more of a personal choice. I would think that you would like to have at least $5,000 for up to a $100,000 property. Then you also need to figure how old the roof and HVAC system are. These two are higher cost items.
I would suggest have around $3000 on hand for emergencies... This should cover you for up to a year unless it is a bad deal and things start happening left and right and the turnkey provider is unwilling to help out with the cost in good conscious since you just purchased property from them. Congratulations and Good luck with your purchase.
There are three schools of thought to your question:
1) Budget a factor of 4% to 8% for potential vacancy depending on the location of your property and the tenant class. And budget another 2% to 10% for repairs and maintenance, again depending on the condition and age of the property.
2) Or you can budget 3% to 4% of the market value of the property as a reserve.
3) Or you can budget 2 to 3 months worth of gross rent per property as a reserve. This is meant to cover vacancy and repairs. Lower this as you build up your portfolio.
I personally prefer #3 and we often suggest the same to our investor clients.
Marco Santarelli, Norada Real Estate Investments | (800) 611‑3060 | http://www.NoradaRealEstate.com
From a lot of articles that I have read, I keep hearing 5% of the property value in cash should be designated for CAPEX or unforeseen needs. Of course, the condition of the property, rehab/reno dates, inspection should be considered. That is what I am going to keep on hand for my properties. Best of luck!
Some good info. Still building my checklist but this is for sure a possibility of finding a turnkey property. Are all of these overarching expenses are considered CAPEX (roofing, furnace, water heater, carpet/paint, window replacement)? What would be the determining factors of what exactly is CAPEX? When an inspection is done prior to buying can some of the big stuff be rolled into a 203K loan (if it looks like you will need CAPEX things done within the first year or so)?
@John McConnell Are you asking more for the tax consequences or budgeting purposes?
@Ben Leybovich Thanks for the candid story about pigs in Ohio and Indiana, good reminder to overestimate capex in any market
@Rollan Dizon I've always hear 5% too but it seems the house condition and location/quality of tenants are the bigger factors
mark. More for the budgeting. Thank you!
Great thread, been wondering the same myself. I was using the 10/10/10 rule (vacancy/maintenance/capex) to be conservative, but the more numbers I see, starting to think that's a little too conservative, especially for me since I'm planning on buying a fully rehabbed turnkey.
Looking forward to seeing more numbers from people.
Not really. It depends a lot on the quality of the rehab job the turnkey provider does. But whatever you use for reserves isn't specific to turnkeys necessarily, its just owning a rental property in general. I'd save up whatever you are comfortable with. If you buy more than one rental property, the income from the other properties can cover the repairs of one. That's what i do. I have all my properties (turnkeys) deposit into one account, separate from all my other ones. But also too, depending on the cost of the repair, the property manager won't take money from you to cover it, they'll just withhold however much it cost from your next deposit.
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Banks usually require you to have 6 months reserves once you start to build a portfolio of rental properties and I think that makes sense ASSUMING you know for a fact the scope of repairs that were performed on the property you are considering. If you do not know the age of the HVAC, roof, and other big ticket items I would add those to your reserve too!
From the lending aspect you are required to have cash reserves for investment property. Here is some info on it.
Acceptable Sources of Reserves
- Checking or savings accounts
- Investments in stocks, bonds, mutual funds, certificates of deposit, money markets funds and
- The amount vested in retirement savings accounts
- Cash value of a vested life insurance policy
Certain assets must be “discounted” when used for reserves. Terms and conditions of liquidation may be required depending on the asset used for reserves.
Assets Requiring Liquidation
The following may be counted as cash assets at 100% of verified liquidated amounts:
- Cash value of life insurance
- Publically traded stocks
- Mutual Funds
- U.S. Government Securities
- Savings Bonds
- Retirement Funds
Cash Reserves Required For Other Properties Owned by Investor;
- If the borrower has 1-4 mortgages, an additional two (2) months for every other SFR investment property and second home is required and additional six (6) months for every other 2-4 unit investment property and second home
- If the borrower has 5-10 mortgages, An additional six (6) months for every other investment property and second home.
Please provide a little more information to help me give you a better opinion.
Where do you consider "cash flowing markets"?
In those markets, what amount of cash flow and projected return on investment are you interested in obtaining?
How will you choose between different offerings in different markets?
On any purchase you may make, how will your debt stack be organized? - IE of the total purchase price what % cash % 1st mortgage, term and rate % 2nd mortgage, term and rate.
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