I understand how the 50% rule is a useful tool in quickly screening through deals. My question is how do you apply the 50% rule to the property as a going concern? What I mean is, are investors paying their expenses and holding the remaining balance of the 50% in a reserve account for each property with the expectation that at some point it will be needed?
It seems that this way you will quickly build a large reserve for each unit. Do you cap it out at a certain point?
I hear of people counting down the days until income from properties accumulates to the next down payment, but are people burning up their reserve accounts?
I'm sure everyone does it differently, but would like some input.
At first I tried to maintain a $5k reserve for each property. Now that I have more properties I am maintaining one reserves fund that does not anywhere near equal the total of that. One reason is they are fairly high cash flow properties so if I need to do repairs or have a vacancy the cash flows from other properties will cover it.
Starting out you should have a minimum reserve of the equilivant of 6 months rent. For major unexpected repairs you should have a line of credit to draw on.
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