Recommendation on Cash Reserves & Vacancy Rate

7 Replies

8,080 Sq. Ft. Office/flex (22 Units)

$900,000.00

Yearly income $103,000

What’s a good guild to use for a commercial office building,

1. Cash reserves

2. Vacancy rate

Cash Reserves really depends on the age and condition of the building and systems. Best to get an estimated cost of repairs and or replacement and spread the cost out over the life of the hold period.

Vacancy will depend on the location, tenant mix and market but a safe factor for a smaller property like this would be 20%. Larger properties 10-15%.

Greg provides a good start but there's much more to consider. The reserve is your safety net. If you have a strong financial foundation, you need less of a safety net than someone with a shaky foundation. Things to consider:

  • Income. Are you living paycheck to paycheck or do you have a lot of discretionary income? A 55-year-old  heart surgeon can probably absorb a $20,000 roof without much trouble while a school teacher may have to borrow the funds at high interest.
  • Number of units. Someone with 50 cash-flowing rentals can absorb a $20,000 roof repair more readily than someone with one rental cash-flowing $100.
  • Condition of the investment. If the property was renovated top-to-bottom four years ago, you would be safe with a small reserve whereas an old home may need a new roof and boiler and water heater and windows in the next 5 years.

That's just a few considerations.

@Mark Monroe

Much more to consider on a commercial property than just cash reserves. Such as required cap rate, market cap rate, NOI, DSCR, vacancy, levered CCR, Unlevered CCR, 50% rule, etc. That being said, three months of gross rent in cash reserves is a good rule of thumb in any REI, but it all depends on the condition of the property.