Does a big reserve hurt you when refinancing?

Question

Been building up a solid maintenance reserve across my properties, feels responsible. But started wondering if having a chunk of cash sitting there, clearly earmarked for future repairs, actually helps or hurts when a lender is looking at liquidity and reserves during a refi or new purchase.

On one hand, showing reserves seems like it should read as financial discipline. On the other, if it's not liquid in the way they want to see it, or if it makes my available cash look thinner than it is, I could see it working against me.

Has anyone had a lender actually ask about how you structure your maintenance reserves, or is this a total non-issue that only matters in my head?

Doug Smith · Answer

That helps a great deal. Many people just focus on the Collateral portion of the "C's of Credit", but I feel Capacity, meaning ability to repay is the most important C. We always look for a primary, secondary, and tertiary form of repayment. The primary is the planned activity for the loan/property such as the flip at the end or the rental income. The tertiary, or third/last resort, is the liquidation of the collateral, but the secondary form or repayment is usually the liquidity of the sponsors. Lenders like us want you to have extra liquidity/reserves. We look for that secondary form of repayment, which is that reserve. That will help you, not hurt you.