$1 Million In Rentals - How Much in Reserve?

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$1 Million In Rentals - How Much in Reserve?

Account Closed
Investor · Phoenix, AZ · Member since 2018 · 420 posts · 388 votes

Ok here goes.... I’ve finally put some of the useful knowledge I’ve acquired over the years on BP into action. My strategy is buy and hold and I’ve just acquired my third deal. I now have approx $1M in rentals but am 90% leveraged. My properties barely cash flow because I’ve only put 5% down on each. Rents in my market (Phoenix) are improving drastically at the moment and appreciation has been EXTREMELY healthy over the last 5 years. Normally if I read a post like this from anyone else I’d advise caution but bear with me....

My strategy is based around maximum leverage to acquire as many rentals as I can right now. My safety net is that I carry a hefty reserve. My question to the group is, given this set of circumstances.....what kind of cash reserve would you be comfortable with?

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Shiloh LundahlPro Member
Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
6y

@Account Closed I would suggest you keep 10% of what you owe in debt up to 1 million (100k in reserves). Then 5% of your debt past that (50k in reserves for each addition million you are in debt). Part of the reason for having so much in cash is if you want to really scale banks are going to require you to keep reserves in their bank in order for them to lend you millions of dollars. They call it the relationship.  I have a about 4 million in loans with one of the banks I use and that bank want me to have about 250k in my accounts with just their bank.

As I started to scale, I leaned toward leveraging as much as I could in order to grow. But as I grew my portfolio more and more, the banks started looking more at my ratios for my global financial situation. In other words they started looking at all of my debts, both personal and business, and they needed it to be at a 1.2 - 1.25 ratio. That means for ever 100k that I had in expenses, I had to bring in 120k -125k in income.

So leverage is a double edge sword. On the one hand, it helps you to grow and scale, and on the other hand, it prevents you from growing and scaling if your cash flow isn’t high enough for the banks (risk managers) to feel comfortable enough to continue to lend to you. We have had good relationships with certain banks that have given us millions of dollars in loans that all of a sudden stopped lending to us because they hired a new risk manager. 

So just keep in mind that leverage can help you grow and leverage can keep you from growing.

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  • Matthew Ringer
    Portland, OR / SW Florida · Member since 2017 · 41 posts · 32 votes
    6y

    12 months PITI

    8Reply
  • Bill F.
    Investor · Boston, MA · Member since 2015 · 1k+ posts · 3k+ votes
    6y

    @Account Closed

    hard to say without more details, like the age of the homes and class of tenant. 

    With that small of a portfolio I'd want to be able to float for 4-6 months paying all expenses for all properties. Add on an extra $5k on top for any misc repairs that need to happen. 

    6Reply
  • Anthony GaydenPro Member
    Rental Property Investor · Omaha, NE · Member since 2014 · 2k+ posts · 3k+ votes
    6y
    Originally posted by @Account Closed:

    Ok here goes.... I’ve finally put some of the useful knowledge I’ve acquired over the years on BP into action. My strategy is buy and hold and I’ve just acquired my third deal. I now have approx $1M in rentals but am 90% leveraged. My properties barely cash flow because I’ve only put 5% down on each. Rents in my market (Phoenix) are improving drastically at the moment and appreciation has been EXTREMELY healthy over the last 5 years. Normally if I read a post like this from anyone else I’d advise caution but bear with me....

    My strategy is based around maximum leverage to acquire as many rentals as I can right now. My safety net is that I carry a hefty reserve. My question to the group is, given this set of circumstances.....what kind of cash reserve would you be comfortable with?

    I own 6 properties worth about $1.4 million and keep about $50,000 in reserves. It’s not all cash though. I keep a chunk in my brokerage account. 

    Honestly though I have not needed more than $10,000 at one time. I have credit cards and a HELOC if I need immediate cash.

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    9Reply
  • Account Closed
    OP
    Investor · Phoenix, AZ · Member since 2018 · 420 posts · 388 votes
    6y

    @Bill F. Class A- and built in 2001, 2010, 2019. All told I’d expect capex at less than $6k per year for the next 5 years.

    0Reply
  • Account Closed
    OP
    Investor · Phoenix, AZ · Member since 2018 · 420 posts · 388 votes
    6y

    @Anthony Gayden any particular reason you’ve settled on $50k? It seems like a market melt down could quickly seize the credit market and wipe that out if rents were to take a drastic dive.

    1Reply
  • Account Closed
    OP
    Investor · Phoenix, AZ · Member since 2018 · 420 posts · 388 votes
    6y

    @Matthew Ringer any particular reason you’d settle on that? Right now that’s roughly $72,000.

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    6y
    how did you get 90% leverage on non owner occ ?  just curious.. 

    so thats really no equity if you take transaction costs into account.

    so to me your only risk is payment risk. and tenant risk like what happened in PHX in the GFC were you had massive vacancies but a lot of that was in older plexs etc.. sounds like you have nice homes in nice areas so i would not be too concerned as long as you had a good year or two of cash or could get it if the worse happened and all three were vacant for an extended period of time which probably is not likly.
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  • Kenneth GarrettPro Member
    Investor · Florida Panhandle/Illinois · Member since 2016 · 4k+ posts · 3k+ votes
    6y

    @Account Closed

    I have just over 1.3 million of assets in rental property.  Leverage is about 68%.   I try to keep 6 months of expenses available at any one time.  The 6 months does fluctuate at times, but that is the goal.  Having access to funds for emergencies is critical.  I’m not sure if the $50K meets that criteria, but it sounds like it should be.

    Good Luck.

    1Reply
  • Account Closed
    OP
    Investor · Phoenix, AZ · Member since 2018 · 420 posts · 388 votes
    6y

    @Jay Hinrichs I bought each one on a conventional loan with 5% down, lived in it for a year, turned it into a rental. Rinse and repeat x3.

    16Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    6y
    Originally posted by @Account Closed:

    @Jay Hinrichs I bought each one on a conventional loan with 5% down, lived in it for a year, turned it into a rental. Rinse and repeat x3. 

    Gotcha !!

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  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    6y

    @Whitney Bowling

    I would say 8-12 months PITI. What exactly are the rents and purchases of these? What's your return on equity?

    1Reply
  • Matthew Ringer
    Portland, OR / SW Florida · Member since 2017 · 41 posts · 32 votes
    6y
    Originally posted by @Account Closed:

    @Matthew Ringer any particular reason you’d settle on that? Right now that’s roughly $72,000.

     High leverage, uncertain economy. Would need a lot of runway for me to feel comfortable. Good chance you won’t need 12 months, but better to need 6 and have 12 than need 12 and have 6. That’s just me though. 

    5Reply
  • Anthony GaydenPro Member
    Rental Property Investor · Omaha, NE · Member since 2014 · 2k+ posts · 3k+ votes
    6y
    Originally posted by @Account Closed:

    @Anthony Gayden any particular reason you’ve settled on $50k? It seems like a market melt down could quickly seize the credit market and wipe that out if rents were to take a drastic dive.

    I don’t base how I run my business on the possibility of rare and unlikely events.

    The $50,000 number is about $5000 for each unit I own. I have 11 units total. 

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    2Reply
  • Anthony GaydenPro Member
    Rental Property Investor · Omaha, NE · Member since 2014 · 2k+ posts · 3k+ votes
    6y
    Originally posted by @Account Closed:

    @Jay Hinrichs I bought each one on a conventional loan with 5% down, lived in it for a year, turned it into a rental. Rinse and repeat x3.

    I love that method, I did the same thing for three of my properties. 

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    4Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    6y
    Originally posted by @Account Closed:

    @Bill F. Class A- and built in 2001, 2010, 2019. All told I’d expect capex at less than $6k per year for the next 5 years.

     If you self-manage, probably your 2 highest PITIs x3 +$5k.  If you have a PM, make it x5 + $8k.

    I've had 4 $20k+ outflow months self-managing about 3 dozen so my min is $30k. 

    6Reply
  • Account Closed
    OP
    Investor · Phoenix, AZ · Member since 2018 · 420 posts · 388 votes
    6y

    @Anthony Gayden makes sense. This is my retirement so I’m exercising extreme caution in terms of cash reserves. I’m also 35 and just getting started so these years are the toughest IMHO.

    I’m moving into MF properties next, it just makes sense.

    0Reply
  • Meir Greenblatt
    Rental Property Investor · Houston TX / Tacoma WA. · Member since 2019 · 166 posts · 89 votes
    6y

    @Anthony Gayden

    In case the market crashes then the money it the brokerage may be worth less and a high yield savings account may be safer.

    Also credit cards and heloc are a good back up for a good market, but in a bad market a lot of times the bank can cancel the heloc and credit cards are risky if the market is down for more then 6 month/year.

    I'm just saying it because I heard guests on the podcasts say it, I personally also really on credit cards for reserves.

    0Reply
  • Billy Smith
    Shawnee Mission, KS · Member since 2016 · 716 posts · 313 votes
    6y

    So, we have different camps max your leverage out so you can GROW FAST!

    In the other camp you pay as you go don’t scale up fast.

    So, if shi… hits the fan the highly leveraged person could be forced to sale at the worst time when the market went down sharply.

    The person who owns most of their properties they just set and watch numbers go down no panic wait it out.

    Some markets are really at a tipping point but the crystal ball can never tell us when the markets are going down, we just look for signs of past down turns, yes history can and does repeat itself.

    The number of doors I have/manage is small all are paid for but one all are worth around 1.6 .

    I use a heloc for reserves that would be 50k ,I just blew through money remodeling my personal house still on going !!

    0Reply
  • Syed H.
    Developer · NY/NJ/PA · Member since 2018 · 758 posts · 935 votes
    6y
    Originally posted by @Billy Smith:

    So, we have different camps max your leverage out so you can GROW FAST!

    In the other camp you pay as you go don’t scale up fast.

    So, if shi… hits the fan the highly leveraged person could be forced to sale at the worst time when the market went down sharply.

    The person who owns most of their properties they just set and watch numbers go down no panic wait it out.

    Some markets are really at a tipping point but the crystal ball can never tell us when the markets are going down, we just look for signs of past down turns, yes history can and does repeat itself.

    The number of doors I have/manage is small all are paid for but one all are worth around 1.6 .

    I use a heloc for reserves that would be 50k ,I just blew through money remodeling my personal house still on going !!

    Leverage doesn't matter. DSCR does.
    that’s what I would look for. I cash out refi on my properties and take my personal equity out. Technically in a bank perspective that’s still at 75% leverage. 

    But what truly matters is, do you have a healthy DSCR for your market. Now every market is different, in certain markets i shoot for 1.6-1.7+. In prime Markets like NY/NJ, 1.3-1.4. 

    For just capex, I usually have $30-$50k. But I Also have other cash flow sources so I’m not too worried. 

    I would aim for 5-6 months PITI + a capex reserve that is healthy for your property type and location.

    1Reply
  • Billy Smith
    Shawnee Mission, KS · Member since 2016 · 716 posts · 313 votes
    6y

    "If the debt-service coverage ratio is too close to 1, say 1.1, the entity is vulnerable, and a minor decline in cash flow could make it unable to service its debt. Lenders may in some cases require that the borrower maintain a certain minimum DSCR while the loan is outstanding. Some agreements will consider a borrower who falls below that minimum to be in default. Typically, a DSCR greater than 1 means the entity – whether a person, company or government – has sufficient income to pay its current debt obligations."

    = Shi.. hits the fan have to sale /refi fil in the blank.

    1Reply
  • Shiloh LundahlPro Member
    Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
    6y

    @Account Closed I would suggest you keep 10% of what you owe in debt up to 1 million (100k in reserves). Then 5% of your debt past that (50k in reserves for each addition million you are in debt). Part of the reason for having so much in cash is if you want to really scale banks are going to require you to keep reserves in their bank in order for them to lend you millions of dollars. They call it the relationship.  I have a about 4 million in loans with one of the banks I use and that bank want me to have about 250k in my accounts with just their bank.

    As I started to scale, I leaned toward leveraging as much as I could in order to grow. But as I grew my portfolio more and more, the banks started looking more at my ratios for my global financial situation. In other words they started looking at all of my debts, both personal and business, and they needed it to be at a 1.2 - 1.25 ratio. That means for ever 100k that I had in expenses, I had to bring in 120k -125k in income.

    So leverage is a double edge sword. On the one hand, it helps you to grow and scale, and on the other hand, it prevents you from growing and scaling if your cash flow isn’t high enough for the banks (risk managers) to feel comfortable enough to continue to lend to you. We have had good relationships with certain banks that have given us millions of dollars in loans that all of a sudden stopped lending to us because they hired a new risk manager. 

    So just keep in mind that leverage can help you grow and leverage can keep you from growing.

    480-206-1209Podcast Guest on Show #287
    16Reply
  • Account Closed
    OP
    Investor · Phoenix, AZ · Member since 2018 · 420 posts · 388 votes
    6y

    @Shiloh Lundahl great read! This is the kind of information I was hoping to gather. Because I’m new to the game and haven’t had much time for rents to mature my cash flow is lacking. I didn’t do anything to create forced equity/increased rent on the front end because I was more focused on creating a hefty reserve.

    With my loans a cash out refi makes no sense because the prop I have the most equity in right now has a 3.25% APR. I'm trying to stay away from refinancing altogether and just carry what I need to out of my reserves until rents outrun my PITI.

    My fear is that credit markets can seize with any drastic event, so cash (and not equity) is truly king. This fear was realized during the GFC and I’m hedging against that.

    What can I do to further protect against frozen lending markets? Personal lines of credit, HELOCs, and most all the other suggestions I’ve come across still rely on banks willing to lend!!!

    0Reply
  • Account Closed
    OP
    Investor · Phoenix, AZ · Member since 2018 · 420 posts · 388 votes
    6y

    @Billy Smith at this point I'm not in the commercial lending space. I'm buying properties as the owner occupant and converting them to rentals one at a time each year. Will DSCR still become a limiting factor? I understand that DSCR disregards reserves.

    The first few years are so hard in terms of cash flow. With no time for rents to outrun PITI I feel like this is the scariest time in my investment journey. My reserves will continue to grow accordingly, but I want to make sure I scale at an appropriate pace!

    0Reply
  • Account Closed
    OP
    Investor · Phoenix, AZ · Member since 2018 · 420 posts · 388 votes
    6y

    @Caleb Heimsoth ROE is extremely low given that I purchased with 5% down with no forced appreciation on the front end. Total rents are $5925 and my cash flow is marginal at best. My focus in getting started was not to target cash flow given my reserves.

    Purchases prices at $300k, $300k, $400k.

    2Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    6y

    @Whitney Bowling you have 6000 in rent on 1M in real estate? I think you are playing a dangerous game...good luck.

    6Reply
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