Rental Property Investor · Moncks Corner, SC · Member since 2019 · 60 posts · 22 votes
I was listening to the Money Podcast, Finance-Friday edition earlier this week. @ScottTrench mentioned having adequate amounts in reserve for a rental property. I close on my first property on Wednesday the 17th. The SFR was built in 2018. Everything is in exceptional condition.
So my question to the BP Community is this, how much money would you have in reserves for a given property? I don’t want to have too much sitting there taking away from the next investment opportunity. As always any insight is much appreciated.
Rental Property Investor · San Diego, CA · Member since 2014 · 1k+ posts · 2k+ votes
5y
Hi all,
This is Swanny from podcast 238. I have coached and tutored people from BP for free since that podcast first aired in 2017. They also featured me on the front cover and a feature article in BP’s new Wealth Magazine, which is really good by the way. At the moment I am a principal in over 230 front doors and counting.
You will most likely not like my answer here. If you only have one single family or one door I will call it, that is pretty risky, like one stock. Especially with this eviction moratorium etc... I would highly recommend keeping about $15,000 in reserves if you have one single family or condo, townhouse type rental property. If you have two front doors and are not house hacking maybe $20,000-$25,000. If you have 3-5 front doors maybe $30,000 if you have 6-10 front doors maybe $35,000-$40,000 due to having economy of scale starting to kick in.
If one ore two or even three go vacant or a tenant dies or a roof blows off or furnace need to be replaced or pipes burst etc... you will have piece of mind and be able to pay the bills for a while.
This is coming from experience. You can never have too much reserves when Murphy’s law rears its ugly head!!
Investor · Colorado Springs, CO · Member since 2013 · 643 posts · 280 votes
5y
This is a good question. I guess investors will be all over the place on this one. For our 19 properties in Colorado, we have slowly built up $20,000 in reserves over the last 8 years. We have never had to touch this, but it is helpful for our peace of mind and it keeps the lenders happy.
Investor · Bloomington, IN · Member since 2019 · 76 posts · 55 votes
5y
I think how much money you hold in reserves really depends on all the circumstances of the property and how long you plan to hold. A new house with no issues will likely not need as much in reserves as a house from the 1950's. We have two properties build in the 60's and 70's, we have around 10k in reserves for each house and I think we will be shooting for around 15k.
Rental Property Investor · Boston, MA · Member since 2019 · 5 posts · 4 votes
5y
@Matthew Horstmyer
I’m doing 6 months rent for each property. So you won’t be affected if your property becomes vacant. And it’s also usually enough to cover any occasional capex expense
Real Estate Agent · Denver, CO · Member since 2020 · 53 posts · 51 votes
5y
Totally dependent on your risk tolerance, desire to leverage and scale quickly and other reserves that could be used on property. Traditionally you want to set aside a % of rental income for vacancy (usually between 5-8%), this is variable based on your area, your property and also the time of year you are renting. For me in Denver finding tenants in winter is more challenging and thus more vacancy cost. Then you want to set aside a % for potential repairs (usually between 5-8%), your property is newer, so maybe you do less here. Lastly you want to set aside % for cap-x or property improvements (traditionally 5-8%) again your property is newer so maybe little to no money here. Then depending on the cash flow of the property, each month this money can be saved, because no matter what something will happen and I promise it feels much easier paying this money out of your property's account and not out of your personal account. Then grow this savings to an amount you feel comfortable with, often people recommend 6 months worth of PITI. After that, grow, grow, grow!
Again this will be a very personal decision for you and something lots of people have their own 2 cents on, so take it all in stride and do what is best for you in your situation.
Rental Property Investor · Gulf Shores, AL · Member since 2019 · 107 posts · 115 votes
5y
@Matthew Horstmyer
I used to keep $1,000/door in reserves for my single family portfolio but decided to pack my war chest when I started buying larger multifamily properties.
Now I alway maintain at least 6 months of PITI + max insurance deductible in addition to any funds earmarked for CapEx.
Rental Property Investor · San Diego, CA · Member since 2014 · 1k+ posts · 2k+ votes
5y
Hi all,
This is Swanny from podcast 238. I have coached and tutored people from BP for free since that podcast first aired in 2017. They also featured me on the front cover and a feature article in BP’s new Wealth Magazine, which is really good by the way. At the moment I am a principal in over 230 front doors and counting.
You will most likely not like my answer here. If you only have one single family or one door I will call it, that is pretty risky, like one stock. Especially with this eviction moratorium etc... I would highly recommend keeping about $15,000 in reserves if you have one single family or condo, townhouse type rental property. If you have two front doors and are not house hacking maybe $20,000-$25,000. If you have 3-5 front doors maybe $30,000 if you have 6-10 front doors maybe $35,000-$40,000 due to having economy of scale starting to kick in.
If one ore two or even three go vacant or a tenant dies or a roof blows off or furnace need to be replaced or pipes burst etc... you will have piece of mind and be able to pay the bills for a while.
This is coming from experience. You can never have too much reserves when Murphy’s law rears its ugly head!!
Rental Property Investor · Moncks Corner, SC · Member since 2019 · 60 posts · 22 votes
5y
@Reginald Ross
Thanks for taking the time and responding. Is there a reason you chose 6 months? I’ve come across that number a lot on forums and blogs. I’m curious why that’s your number. Do you ever feel that those funds could be better utilized elsewhere as opposed to sitting on the “sideline?”
Rental Property Investor · Moncks Corner, SC · Member since 2019 · 60 posts · 22 votes
5y
@Michael Swan
Thanks for taking the time to respond. I will make it appoint to go back and listen to your episode. Based on your experience, if you could tell all new investors starting out a single piece of advice, what would it be?
Rental Property Investor · Gulf Shores, AL · Member since 2019 · 107 posts · 115 votes
5y
@Matthew Horstmyer
The 6-month policy isn’t an arbitrary one and my philosophy actually addresses your concern about underutilized capital.
In general, there is typically a trade off between risk and reward for any investment. As a syndicator, I have an obligation to be a good steward with my investor’s capital and spend a significant amount of time identifying the optimum capital structure of each investment which includes market research and actually quantifying the risk premium.
What I’ve found is that the equilibrium reserve amount typically works out to this 6-month value due to current lending practices, legal constraints, etc. Big Banks adopt this policy for a reason.
I’ve experimented (in solo ventures) with less reserves and never got into a insolvent situation but if something catastrophic would have occurred, the possibility still existed.
So, now I choose to give away a few % of annual return on equity in exchange for a protective buffer. Also, I live on the gulf coast and hurricanes happen frequently. A $58k hurricane deductible isn’t easy to come up if you don’t already have it Investors (and myself) like that peace of mind.
Did that answer your question? I feel like I meandered a bit lol
I would say biggest piece of advice on people starting out, is now watch podcast 238. I gave a lot of advice on that podcast. I was also featured in Brandon and Josh’s book called How to Invest in Real Estate the Ultimate Guide to getting started in the first ch one pages 25-26. Talk to people and learn from people that own properties in the areas you want to invest. Be careful of brokers, residential and commercial that are trying to recruit investors like many on here due to compressed cap rates and really high valuation states like I have in California. I never take advice financial advice from people that have not traveled the road I would like to travel on. Plus, you want get advice from straight shooters that tell about the good and the bad. Lessons learned and land mines already stepped on can be avoided by getting advice from the right people. Possibly, you can add value to each other and do deals together too in some form or fashion in the future too!!
Real Estate Agent · Baltimore Maryland · Member since 2019 · 98 posts · 74 votes
5y
My goal is to save up 6 month rental reserves for each property (not expenses/mortgage, but rental income). To me, that's the level amount I would need to feel comfortable.
Rental Property Investor · Inlet Beach, FL · Member since 2018 · 199 posts · 111 votes
5y
@Matthew Horstmyer
If you plan to use traditional financing, you'll have to provide reserves for each property owned every time you get another investment loan.
FNMA goes with 2%, 4%, and 6% of the unpaid principal balance. FHLMC requires 6 months, then 8 months. And these are general. Each situation varies slightly.
But aside from that, there will be times you need to fix something or spend money you weren't expecting to... for most beginning investors that can be disastrous even with cash-flow from other properties.
If you can build a cushion of 6 months reserves without hindering your growth and new investments, that's a good number. In the future with more experience, you might be okay with 3 months.
Having credit lines goes a big way but you should have liquid cash too which is tough starting out
When your small you’ll need plenty of money I’d say 3-5k per house then
As you grow you can get by with less this is why I tell people if your going to landlord just go big as fast as you can . Get to 10 as quickly as possible ! it actually is less risky contrary to popular belief because if a furnace dies you can absorb the hit if you have over 10k of rental income coming In , if you have a duplex it really hurts dropping 4K for a furnace ! There is safety in numbers