Where do you keep your contingency funds?

17 Replies

This is my first BiggerPockets post as a new investor. I am curious, what types of accounts/investments are people using for maintenance/repair funds and/or rent deposits? Are there any rules of thumb in terms of percentages of reserves requiring immediate liquidity, 3 month liquidity, etc?

Check your state laws for security deposit requirements. In Florida we are required to have segregated accounts for them. I use three accounts: one for security deposits, a savings account where I deposit all rental income, and a checking account for paying the bills. I hold quite a bit in reserves (probably too much) but never have an issue if something needs replacing. 

Do you use a CD for a percentage of rental deposits? There is no way everyone will leave at once barring natural disaster.

@Seth C. , in some states, landlords are prohibited from earning/keeping the interest generated from Security Deposits.  If that is the case in your state, it is pointless to place Security Deposits in CDs. 

Also, whether you think it is unlikely that all tenants will move out at once is not relevant.  Again, state laws in many states require landlords to have all Security Deposit funds available at all times.

You should probably read up on the Landlord laws in your state.  Here is one brief rundown on New Mexico laws regarding security deposits:

http://www.rentlaw.com/dep/nmdeposit.htm

It's probably wise to look up the actual written law in your state and read it all.  That will give you a more complete understanding of things.

Good luck.

What about repair reserves? It also seems like most major repairs that might come up can wait for a few months, so that a percentage of reserves could be kept in a CD or something similar, with a penalty for early withdrawal the worst-case scenario.

Rarely have the major expenses been able to wait.  Pipes burst in the front yard, Surprise inspection results from Section 8.  Tenant wrecks a unit.

Your reserves should be held in a relatively liquid format.  The returns on a CD are not worth the time a unit sits empty because of disrepair or damage. 

Cash is king.  It's nice to have investments, but you should always have suitable liquid cash available for emergencies.  After you've built your emergency fund account, you can build a separate investment account to use for CDs or other investments.

Like @Sean Ploskina said, when an emergency happens in one of your properties, you usually have to act immediately.  It's not good business (and is sometimes illegal) to make a tenant wait on a repair because you placed your money somewhere where it takes four days to get it back.

@Seth C.

I agree with @Sean Ploskina in that major repairs usually cannot wait. Anything from a hole in the roof to fallen tree (safety hazard) to burst pipes to dead HVAC, so your reserves need to be relatively accessible.

That said, we keep $3k in a checking account for each property. In addition, we keep 13 months of reserves in a money market - easy to liquidate in case the emergency requires more than $3k. 13 months of reserves can be overkill (our financial planner tried really hard to convince us 3-6 months is enough), but I like to be conservative and lenders kind of like it . Also, we don't use that money ever for investing, anything we use for investing is saved above and beyond the reserves. 

@Betty T. :

How many units are your properties for which you keep 3k? Would you have a per-unit rule of thumb for larger properties?

Hey @Seth C.

Just SFRs, I don't have multis. So, 3k for each SFR readily available.

Agree with @John Thedford on the state law piece.

As for 'general' contingency. I stick with FDIC insured accounts, like savings and checking. Rates are abysmal these days. However, we have a credit union that has been giving us 3% (15k and under) for years. They just moved it to 2.8%, but that's still 2.75% higher than what you can get at large brick and mortar banks. They are based in Michigan, but I would recommend trying to find other good ones near you: http://www.mycreditunion.gov/pages/mcu-map.aspx

Seth, I recently became a Real Estate Associate Broker in Albuquerque and learned all kinds of things about trust accounts and property management. The Qualifying Broker I signed up with also does Property Management. I am not an attorney, please contact your attorney to make sure you are following the law. You can look at the NM State Law regarding real estate here at the NMPRC web site: http://www.rld.state.nm.us/uploads/files/Final_NM_...

Jimmy Devenport

Real Estate Associate Broker

Rock Solid Properties, LLC

8205 Spain Rd NE Ste #208

Albuquerque, NM 87109

505-596-0496 / 505-823-2222

@Jimmy Devenport :

Thanks Jimmy,

It is always good to have local input! Feel free to PM if you have any tips on the local MF market...


Welcome to BP @Seth C. !  Are you managing these for your own portfolio, or for someone elses?  That will make a  big difference in how things need to be handled, especially in NM.  To be general, in New Mexico, most property management accounts are non interest bearing by statute.  There are more rules, but it really depends on what you are trying to accomplish.

@David

The question regards either my own accounts or accounts for a property owned by an LLC. I just want to maximize my ROI, so the most money from every aspect is best ;~). At this point in the conversation it seems like there is only hope for contingency funds, and it seems that should work in even a low-paying money market or something similar. What's the best case scenario locally?

Many thanks, Seth

So are you saying that someone else will be managing your property for you (I.E. a property management company)?

Legally, yes.

Check out Ally bank. They offer 0.99% interest for an online savings account (they have no brick-and-mortar banks). It's easy to set up an account(s) quickly and they reimburse all ATM fees. If you had all your emergency funds and deposits in there and it was say $5,000 worth of cash, you'd earn $50/year which isn't much, but you could take you wife/gf out to dinner. Anything you would invest money you need to potentially be liquid quickly (CDs, bonds) don't pay enough right now to be worth the time/hassle delay to get your money out.

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