Capitalizing Your Business

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Capitalizing Your Business

Matthew Horstmyer
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.

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Michael Swan
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!!

I love this stuff!! Onward and upward!!

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  • Tucker Cummings
    Investor · Raleigh, NC · Member since 2019 · 433 posts · 743 votes
    5y

    I’m also in the just starting out phase, but it sounds like a little further along than you. My personal preference is having $5,000 per door, which sounds similar to @Michael Swan advice towards the upper end of his recommendations. $5,000 covers a lot of capex that might come up, but maybe at the start it’s a little lower than his recommendation. I’m at 3 doors and $15,000 in reserves so, for me, I have good peace of mind with this.

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  • Brian G.
    Rental Property Investor · Los Angeles, CA · Member since 2013 · 1k+ posts · 1k+ votes
    5y

    @Matthew Horstmyer it really depends on your overall financial position. If you've already built a strong financial position (low consumer debt, strong income, personal reserves, etc.) you can get away with less. If not you should have more. Covid taught us all that you can never have too much in reserves. To answer your question imo minimum of $10k. Banks will require you have 6 months of PITI in reserves after closing. Add *at least* $5k on top of that number so you can sleep well. Good luck!

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  • Matthew Horstmyer
    OP
    Rental Property Investor · Moncks Corner, SC · Member since 2019 · 60 posts · 22 votes
    5y

    @David A Lisowski

    Thank you for the information.

    1Reply
  • Matthew Horstmyer
    OP
    Rental Property Investor · Moncks Corner, SC · Member since 2019 · 60 posts · 22 votes
    5y

    @Dennis Wayne

    Thanks. Would you use credit available before you use your cash reserves for expenditures?

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  • Matthew Horstmyer
    OP
    Rental Property Investor · Moncks Corner, SC · Member since 2019 · 60 posts · 22 votes
    5y

    @Tucker Cummings

    Thanks. Are your properties SFR or otherwise? How did you find the purchase?

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  • Matthew Horstmyer
    OP
    Rental Property Investor · Moncks Corner, SC · Member since 2019 · 60 posts · 22 votes
    5y

    @Brian Gerlach

    Thanks

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  • Tucker Cummings
    Investor · Raleigh, NC · Member since 2019 · 433 posts · 743 votes
    5y

    @Matthew Horstmyer Yes, SFH right now. So 3 houses, 3 doors. Scaling into MF as quickly as possible.

    0Reply
  • Hersh ShahBusiness Member
    Realtor · Atlanta, GA · Member since 2016 · 120 posts · 79 votes
    5y

    @Matthew Horstmyer congratulations on the upcoming closing!

    Everyone will have their number depending on how risk averse they are and how much of a safety net they need.

    I know from doing my own research from an acquisition standpoint, lenders like to see 6 months to feel comfortable for each property.

    For me that is the baseline. That said, I only use the cashflow to get to that amount. I try to keep our funds separate from the property funds. I take nothing out until I have at least the 6 months.

    My properties are 2019+ built so I dotn foresee needing any money other than turning over with paint etc.

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  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    5y

    @Matthew Horstmyer there are three primary reasons you want cash reserves:

    1. Cover expenses in the event of vacancy. Usually that two months at the most.

    2. Cover expenses and eviction in the event of non paying tenant. Prior to COVID you could plan on 1-2 months and attorney fees. With the eviction moratoriums, some people have not received rent for a year! 

    3. Cover larger repairs, like HVAC, sewer main, etc. These expenses could be $5000 up to even $10,000 for a sewer main if it is deep or involved cement work.

    Not all of these things are likely to happen at the same time, so you are not planning "worst case" as much as you are likely risk. There is also the other option of borrowing money to cover some of this, so you may keep a reasonable reserve to cover a couple months and borrow for extreme situations. 

    The other factor here is what other funds you may have to tap in an emergency. For example, some people keep a 6 month cash emergency fund for personal expenses. Or you may have money in retirement accounts. These should not be your primary funds for rental property emergencies, but they may be supplemental in extreme situations.

    I would say for one property, keep around $10,000 minimum in reserves. For two, something like $15,000 (so not double). When you get to higher numbers of properties, you may not even keep adding emergency fund money. Having more properties spreads risk. It is very possible to have one unit vacant, but having ten properties fully vacant is very unlikely. It is possible for one furnace to go out, but ten furnaces is unlikely.

    Another thing to consider is proactively spending CAPEX. Some people wait until a roof leaks or AC stops working to replace it. We budget and update things that are at the end of their life. It is easier to replace an AC unit in March when it is not hot, then in August when it becomes an emergency. We find by staying ahead of updates, our properties stay in better condition and we have less emergencies.

    1Reply
  • Ola Dantis
    Multifamily Syndicator · Houston, TX · Member since 2016 · 1k+ posts · 2k+ votes
    5y

    Always a fantastic idea to set aside a reserve for the unexpected. 

    Also, what I'd recommend that you add to that is a home warranty for the property since it is an SFR, you can get a Home Warranty for like $50-$100 per month so if and when you get a big-ticket item you can use the Home Warranty instead or in conjunction with your reserves.

    You can never be too careful when it comes to unexpected expenses! Congrats on the close. 

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  • Michael Wentzel
    Investor · Colorado Springs, CO · Member since 2013 · 643 posts · 280 votes
    5y
    Originally posted by @Matthew Horstmyer:

    @Michael Wentzel

    Do you every worry about having too much in reserves and not being able to utilize the money for the next deal?

    Also, I think this is the first time I’ve heard anyone mention reserves keeps the lender happy. Would you please explain how that can come into play?

    Like most of the others have stated, there are many variables. As we brought more properties and loans on, our lenders would often raise the number they wanted in our reserve account. So it was good to have the pressure. Otherwise I probably would have thrown all my cash at the next deal. Having credit lines may also reduce you need for cash reserves. You can us credit lines (or credit cards) to a major capital expenditure or a big flucuation in your cashflow. However, I have never had a lender ask me about much available credit I have. They have always asked about reserves.

    Mike

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