$1 Million In Rentals - How Much in Reserve?

[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?

[Shiloh Lundahl]

@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.