How much cash do you recommend having in reserve for rental (SFH converted to a duplex)? The house is old, 1916. The roof is new, and the furnace & AC is 2011.
I always have a reserve of 6 months of expenses. Stuff always seems to pop up, AC, Furnace could become an issue, electrical, pests etc... Until you have 10 or 20 properties cash flowing, then its always best to air on the side of caution and have 6 months or so. That should easily cover the AC, furnace, electrical or any other issue that might arise. Also, banks will like to see that you have cash reserves of approx 6 months when you finance future properties anyways.
How much cash do you recommend having in reserve for rental (SFH converted to a duplex)? The house is old, 1916. The roof is new, and the furnace & AC is 2011.
Hey Artur.... Good question! Here's what I do...
First, some context...
I have 104 houses. Most of my properties are aged 1920 to 1960, ARVs range from $70k $120k. They are invariably rehabs where we often replace the roof and furnace. They rent between $775 and $1,000. Taxes vary from $800 to $2,000.
I allocate as follows:
At leasing: $2,500 in the reserve account.
Ongoing: 10% of gross rents added to the reserve account monthly for repairs/vacancy.
Ongoing: Prorated taxes added to reserve account monthly.
Ongoing: Prorated insurnace added to reserve account monthly.
Ongoing: 10% Management paid out of gross rents.
An average house looks like this:
Rent: $975 Management: $90 Taxes: $125 Repairs/vacancy: $90 Insurance: $50 Note after cash out refi: $450 NET cashflow: $170/month
This leaves zero cash in the deal, $2,500 in reserve funded from the cash out refi, maybe a few bucks cash to me as well, reserve fund increasing by $90/month from the get-go.
Everyone is different, but that's how I do it.
Remember, these are houses I just rehabbed, so while stuff still goes bump in the night, we preempt a great deal of capex. Also, I have sufficient scale to accommodate unexpected capex from my overall cashflow amd total combined reserve fund.
I always have a reserve of 6 months of expenses. Stuff always seems to pop up, AC, Furnace could become an issue, electrical, pests etc... Until you have 10 or 20 properties cash flowing, then its always best to air on the side of caution and have 6 months or so. That should easily cover the AC, furnace, electrical or any other issue that might arise. Also, banks will like to see that you have cash reserves of approx 6 months when you finance future properties anyways.
Thanks for the input. 6 months of mortgage payments/PM expenses?