Use all reserves for a good deal?

Rental Property Investor · Salt Lake City, UT · Member since 2020 · 29 posts · 11 votes

I have an offer accepted on a 4plex. It will cash flow upon the sale. I have a contingency in place for the inspection since it's out of state. My only concern is the down payment and closing costs will essentially wipe out my savings. Is it worth locking the deal down? I've had trouble figuring out creative financing for a buy and hold properties. Seems easier to make sense with BRRRR's and flips. Any advice? Thanks y'all!

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Jonathan GreeneBusiness Member

Real Estate Consultant · Madison, NJ · Member since 2016 · 6k+ posts · 7k+ votes

I would never, ever deplete all of my savings for a deal. Many lenders want you to have 6 month reserves at a minimum left over now so you may want to check with them so you don't get close and realize you can't close. What are you going to do when a major repair comes up? On a four-plex you should have four boilers, four hot water heaters and with no reserves you will be hard-pressed for a solution when something goes wrong. What's your income per door after expenses each month? What if you need a new roof? You either need a backup investor for reserves or pass on the deal. Everyone wants a four-plex and for good reason, but without reserves you may never make money on it if all your profit always goes to repairs and more.

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Theresa HarrisPro Member
Member since 2019 · 15k+ posts · 11k+ votes
6y
How often do deals come up in your area and have you confirmed the rents (and that they are being paid)? You already put in the offer, so my guess is you will do this unless the inspection throws up red flags.
If you do the deal, make sure to get the security deposits from the previous owner.
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Pat L.
Rental Property Investor · Upstate, NY · Member since 2012 · 3k+ posts · 3k+ votes
6y
Another thing I ALWAYS check for is compliance. Some of the cities/towns are getting tough with multi's on fire safety & that can add up real fast especially of your out of state. I had a fellow investor get stuck with a $20k fire sprinkler system upgrade. The old system was there in disrepair & probably sat like that for many years. But he was assured by the seller it was no longer needed. As soon as he bought it the sale triggered a visit from the Bldg. Insp., & that blew a few years of cash flow & reserves.
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Max Versteppen
Member since 2020 · 113 posts · 33 votes
6y
The most typical cash reserve requirement is two months. That means that you must have sufficient reserves to cover your first two months of mortgage payments. So if your principal, interest, taxes, and insurance (PITI) come to $1,500 per month, the reserve requirement will be $3,000.
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Andrew SyriosPro Member
Moderator
Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
6y
For a good deal, probably not. For a great deal, yes.
You could also consider bringing on a partner so you don't deplete your cash reserves.
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Jonathan GreeneBusiness Member
Real Estate Consultant · Madison, NJ · Member since 2016 · 6k+ posts · 7k+ votes
6y
I would never, ever deplete all of my savings for a deal. Many lenders want you to have 6 month reserves at a minimum left over now so you may want to check with them so you don't get close and realize you can't close. What are you going to do when a major repair comes up? On a four-plex you should have four boilers, four hot water heaters and with no reserves you will be hard-pressed for a solution when something goes wrong. What's your income per door after expenses each month? What if you need a new roof? You either need a backup investor for reserves or pass on the deal. Everyone wants a four-plex and for good reason, but without reserves you may never make money on it if all your profit always goes to repairs and more.
[email protected]Podcast Guest on Show BiggerPockets Daily 667: 5 Amazing Benefits Multifamily Investments Offer (That Single Family Homes Don’t) by Gino Barbaro
Zen and the Art of Real Estate Investing59 Reviews
Website View Page
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Dimitri Paspalaris
Investor · Rota, Spain · Member since 2019 · 156 posts · 68 votes
6y
You need to have some cash savings in hand just in case a rainy day occurs in your life. For me it is 3 months worth of money. Deals will come and go but if you get a rainy day and can't cover it is gonna be real hard to come back.
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JC Leach
OP
Rental Property Investor · Salt Lake City, UT · Member since 2020 · 29 posts · 11 votes
6y
@Theresa Harris
the area is out of state. It’s a solid deal but I’ve seen a few recently so I wouldn’t be too upset to let it go. I will get the deposits if closing. I will likely only pass if inspection doesn’t go as planned. Thanks for the advice!
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JC Leach
OP
Rental Property Investor · Salt Lake City, UT · Member since 2020 · 29 posts · 11 votes
6y
@Pat L. That’s solid and I hadn’t looked into that! I’ll be on site for the inspection so I’m assuming the inspector would know local codes? I’ll research that ASAP.
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JC Leach
OP
Rental Property Investor · Salt Lake City, UT · Member since 2020 · 29 posts · 11 votes
6y
@Andrew Syrios
That thought definitely crossed my mind and is becoming more of a possibility!
Thanks!
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JC Leach
OP
Rental Property Investor · Salt Lake City, UT · Member since 2020 · 29 posts · 11 votes
6y
@Jonathan Greene all cap ex were recently replaced minus the roof which is one of the things I intend to go look at with the inspector. 6 months would be cutting it close for my reserves so I’ll have to take that into consideration. Thank you!
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JC Leach
OP
Rental Property Investor · Salt Lake City, UT · Member since 2020 · 29 posts · 11 votes
6y
@Dimitri Paspalaris
You’re absolutely right. I’m just stuck on the saying “don’t say you can’t afford it”. Say “how can I afford it”. So it looks like I’ll need to find a partner in crime!
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Matt Leber
Rental Property Investor · Orlando, FL · Member since 2015 · 353 posts · 269 votes
6y
@JC Leach I wouldn’t. If there’s one thing COVID has taught me its that reserves are important. You never know what your tenants are going to do under this weird time of eviction moratoriums, government intervention, rent strike talk, etc.
Another option if you must do a deal: if you own a primary get with a bank to open a HELOC against it. This could give you a fund to use in emergencies at a low interest rate in case all crap hits the fan with your new deal. I would not depend on a HELOC as your reserves indefinitely, but it could work in a pinch if a great deal comes your way. However, in order to implement this strategy you would likely need to complete your HELOC closing prior to obtaining financing on the current deal. I don't think you can open one in the middle of closing on a deal, the lender might see it as a red flag.
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JC Leach
OP
Rental Property Investor · Salt Lake City, UT · Member since 2020 · 29 posts · 11 votes
6y
@Matt Leber that’s a fantastic idea. I thought about doing one for the purchase but it hadn’t occurred to me to have one as a rainy day fund for emergencies. I’ll look into that today! Thank you!
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Syed H.
Developer · NY/NJ/PA · Member since 2018 · 758 posts · 935 votes
6y
If it’s an absolute home run I would flip/wholesale it to another investor for a small fee.
I would never deplete all my savings unless I had a cash windfall coming very soon.
1 Reply
Nick Barlow
Warsaw, IN · Member since 2017 · 229 posts · 270 votes
6y
@JC Leach I’ve been in those shoes and decided to go for it. I can’t say I regretted it then, but I can say that all of a sudden I realized just how old some of the water heaters and furnaces in the rest of the portfolio are. I noticed that I cared more when Smaller maintenance issues came up, and also wanted to build back those reserves way more quickly than the added Cashflow allowed. I also felt more stress after the deal than I thought I would.
If you have to come out of pocket to cover an unexpected emergency...like wave 2 of COVID lockdowns leaving units empty for 60-90 days...or the threat of future job insecurity rising...and can stomach that, don’t let me or any stranger on the internet stop you.
I am not even considering touching reserves for anything other that purpose right now, but that is me, and what’s right for me isn’t right for you.
Good luck on your journey!
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JC Leach
OP
Rental Property Investor · Salt Lake City, UT · Member since 2020 · 29 posts · 11 votes
6y
@Max Versteppen I could manage that. Some have said 6 months which would be real trouble
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JC Leach
OP
Rental Property Investor · Salt Lake City, UT · Member since 2020 · 29 posts · 11 votes
6y
@Nick Barlow that’s great advice. Thanks for adding your own experience to it. Makes a lot of sense that way. Thanks a bunch!
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Martin NealPro Member
Rental Property Investor · Chicago, IL · Member since 2017 · 293 posts · 383 votes
6y
@JC Leach it’s about your comfort level with being that leveraged. Being younger and a little more pro risk, I may do it. Considering we are coming out of a pandemic, I’m holding out for great deals, not just good deals. Good luck.
1 Reply
Steve K.
Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes
6y
@JC Leach every building I’ve ever bought has had some hidden deferred maintenance/ unexpected cap ex issues that came up in the first year of ownership. I’ve had sewer lines fail, ridiculously expensive tree work I wasn’t expecting, hail storms, plumbing leaks that made a unit un-live-able, bad tenants, new city ordinances being enforced I’ve had to comply with, property tax increases, you name it. For that reason, on a quad I want at least $10k in reserves personally, and I plan on spending it. But each of us has our own level of risk tolerance. If it really is that great of a deal, you might consider taking out a high limit credit card with as long of a 0% interest rate introductory term as possible, or have a hard money lender/family member lined up you can borrow from if needed or something. You may need a source of funds in a worst-case scenario, just to carry you until you are able to replenish reserves. I wouldn’t do it though, personally. The problem is, you never really know if a building is a great deal or not until you’ve owned it for awhile and see how it actually performs. The saying “too good to be true” comes to mind. Especially with it being out of state, I would not trust the seller’s numbers on expenses nor would I go in without ample reserves. Murphy’s Law applies in these situations in my experience.
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JC Leach
OP
Rental Property Investor · Salt Lake City, UT · Member since 2020 · 29 posts · 11 votes
6y
@Martin Neal
I think real estate in general makes me uncomfortable because I’m newer. So I’m trying to become comfortable with being uncomfortable while I’m getting these processes down.
1 Reply
JC Leach
OP
Rental Property Investor · Salt Lake City, UT · Member since 2020 · 29 posts · 11 votes
6y
@Steve K.
Wise words! Thanks Steve!
1 Reply
Jai Reddy
Edmond, OK · Member since 2012 · 456 posts · 270 votes
6y
@JC Leach
One option is to perform due diligence, find those deferred maintenance or capex items NOW, negotiate price lower, see if you can make the deal - along with securing a 0% credit card for atleast the first 6 months, etc.
Do you have a W2 job? Spouse? Any existing debt?
Another option is to move on and you will continue to save cash for the next deal, and will find that since you’ve saved more cash you can take on a bigger deal, hopefully in your own state or closer.
1 Reply
JC Leach
OP
Rental Property Investor · Salt Lake City, UT · Member since 2020 · 29 posts · 11 votes
6y
@Jai Reddy
I am heading out to finish up my due diligence in a couple weeks. My contingency is for 15 days so I'll be walking through the home with the inspector to find those items. If all goes well, then the options are a CC or HELOC. I'll be looking into both of those options.
I am actually starting medical school soon so we are relying on my wife’s job and our past savings for our properties.
Most comments have made it pretty clear, drying up reserves is risky. So I’ll either try to draw down the cost or pull the plug depending on the inspection. Thanks for reaching out!
1 Reply
Pat L.
Rental Property Investor · Upstate, NY · Member since 2012 · 3k+ posts · 3k+ votes
6y
Originally posted by @JC Leach:
@Pat L. That’s solid and I hadn’t looked into that! I’ll be on site for the inspection so I’m assuming the inspector would know local codes? I’ll research that ASAP.

Good idea. A year after we bought our last multi we got the visit. We had done the due diligence at the town, nothing outstanding etc etc. Then a multi in the town burned down so all of a sudden we had inspections for plumbing, electrical, fire safety etc etc as per their new residential RENTAL building compliance codes.

We HAD to hire a Commercial Architect & then design, install & monitor ($100/month) a 24/7 fire sprinkler system, BUT they let me do all the design/install work, didn't even force me to get permits, but were on my azz every week for updates.

Got it done & they have left us alone since.
1 Reply
Michael Henry
Rental Property Investor · Palm Bay, FL · Member since 2019 · 75 posts · 53 votes
6y
@JC Leach
Personally I would as long as you have a plan in place to replenish your savings and low / interest free credit lines to cover you in the short term for emergencies.
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