Amount of reserves needed when buying your first rental property?

[Brian Beadle]

Hello All, I will be in a very good spot to being building my buy and hold strategy in the next few months and I am curious as to what everyone sees as the appropriate amount to have in reserves when buying your first property. Lets say its a 100K B class property for sake of conversation. 

Also, how about the reserves on a B class 4 plex? 

[JD Martin]

My (rough) rule of thumb is at least enough reserves to run/maintain the property through one year of vacancy without losing the asset or having to sell. This should cover all but the most catastrophic conditions. Other people are comfortable with less. 

Example: if I had one property owned free & clear, with only $200/mo taxes/insurance/utility costs, and one with a $500 mortgage/insurance/taxes/utilities cost, I would want to maintain at least $8400 in liquidity for those two assets. Note that liquidity doesn't necessarily have to mean cash sitting in an account - it could be easy access to a HELOC, easily convertible assets (bonds, etc), whatever. And you can play with those numbers however makes you comfortable - if you wanted to add a monthly cost for capital expenditures, for example, or a set-aside for tax purposes.

The main thing you do not want to do is have to unload your asset in a fire sale for lack of liquidity. Lack of liquidity is the quickest exit from this business and the thing (in my opinion) that sinks most investors.