Working Capital

2 Replies

This probably isn't the sexiest question, but for those of you who are buy and hold investors, how do you determine working capital requirements. My initial thought was that I would take PITI x 12 as an initial working capital metric, and start to run more lean as I get some more experience.

I'd be interested to hear how folks who have done this for a while look at working capital.

Fannie and Freddie consider six months PITIA (A= anything else, such as HOA) per property to be adequate. I'd say six months rent is safer.

When I was starting out, working capital was my next paycheck and my credit card and/or a 401K loan - then I had a couple months where things were REALLY tight and decided I would set a minimum threshold that I wouldn't go below. I definitely recommend having and keeping a cushion!

What that cushion can/should be will vary greatly based on the types/locations of properties you invest in and the relationships you have with vendors. If I had to call one of the big box plumbers or HVAC companies every time something came up, I'd be looking at north of 2x the cost compared to what I actually pay. Knowing what you can expect and knowing who to call will greatly change the amount of reserves you need to keep to feel comfortable.

That being said, 6 mos of PITI + HOA would be an excellent benchmark starting out. As you grow, you'll get a better feel for what you need to operate on and you can scale that back (or up) as needed.

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