Cash Reserve for rentals

[George Marshall]

Is there a rule of thumb for how much cash reserves to keep per rental unit? I keep seeing different numbers and don't know what's realistic.

[Richard F.]

Here is a Useful Life Table that tells you the expected life of various elements. If you know the age of the property/unit, or have proof positive of complete replacement of a particular element X years ago, this will tell you, statistically, when to plan for replacement of each element. These are time estimates that should be scrutinized more closely as they approach. Actual life will vary based on type and quality of certain materials and products, as well as whether or not regular preventative maintenance has occurred over the long term, but they will get you close, although IMHO the plumbing waste and supply line estimates are pretty optimistic. The closer you get to the "useful" life, the more maintenance issues will increase.

One great idea that Condo/HOA's implement, although often poorly executed, is to establish a separate "reserve" fund for each major element that will cost $10,000 (or $5,000 if you prefer) or more for major repair or replacement. Contribute to a reserve fund for each element based on number of years before the end of it's "useful" life. For an item that will cost an estimated $20,000, and will need replacement in 10 years, you need to set aside $2000 per year/ $167 per month for that specific element. This way the funds will be there when the time comes.

Of course, if you have deep pockets, or other guaranteed source, maybe you don't need to plan so accurately for long term expenses. Of course, other issues can always arise that force your hand and require additional funds unexpectedly too, so consider that as well.