Cash Reserves per Property??

Question

I've done one deal so far.  A duplex.  I'm really looking to scale quickly with small (10-20 unit) apartments now.  I've seen how costly repairs can be from this duplex, and I wanted to know from others, is there a minimum amount of reserves you build up in Property A BEFORE acquiring Property B..C..D..?

Jason Hirko · Answer

@Mark Douglas I keep 6 months of mortgage payments and historical maintenance costs in reserves. I will use those for unexpected repairs if needed. The more properties I get, the more lax I get on that, as one long term vacancy doesn't hurt as much.

Trevor Ewen · Answer

@Mark Douglas

Wrote an article recently for BP on the importance of reserves:  https://www.biggerpockets.com/renewsblog/2016/07/09/strong-case-reserves/

@Jason Hirko 's standard sounds pretty good. We put away 10% per month (of gross) no matter what. We just assume those big CapEx expenses are coming down the line.

I do think it's much easier to fudge these numbers if you have a full-time job and can inject some money if necessary. If you are living off rental income (which I assume you are not), I would recommend a much higher reserve fund, because you can't pull from anywhere else except for credit cards and other high-interest debt vehicles.

Don't rely on your job to prop up your (potentially bad) investments. But, it can definitely help you inject some liquidity and let you put more of your capital into new investments. There is great long-term value in creating systems for reserves, but also a lot of short-term value in keeping your money moving forward, particularly if you have a W2 cushion.

Mark Douglas · Answer

@Monica Dixon  Hey Monica, the property was built in 1985, so not ancient, but definitely not in great condition.  There was a lot of deferred maintenance (subfloor damage, gutters needed replacing, etc)  The more I uncovered things, the more damage I found.  Both sides have been completely gutted (except the bathrooms, which were ok) and I've done new drywall, flooring (durable vinyl, no more carpet for me haha) HVAC installation, new water heater for one unit, interior doors, paint, trim, etc.  Basically everything is new, except the bathrooms, which just needed a touch up..new vanity and paint)

There are two ways to go about this, from what I've seen:

1) Complete all of the repairs on the front end, continue budgeting for capex, knowing there should be very few issues the next few years

2) Do the repairs a little at a time, and spend the capex you budget for each month, till the repairs are finished, and continue setting aside $$ for future expenses

I chose the former, because it was becoming a headache, and I just wanted to get this thing finished lol, but it just depends on your personal preferences.  The property "should" be relatively problem-free for the next 3-5 years IF the tenants take care of it....

Monica Dixon · Answer

@Mark Douglas

This is my first post a newbie. Could you tell me what kinds of repairs you encountered? I would like to get into the duplex/triplex niche with the intention that I would buy and hold. That plan, at least from my understanding was that I would build those reserves over time for those large expenses.

Is that a bad idea?

Thanks in advance.

Mark Douglas · Answer

@Derek Montes  total cost was $95k (I just closed in March) 1985, in the middle of light rehab now, so far I'm running about $5k give or take.  I'm living in the front side of the duplex while fixing it, the back is rented for $680, mortgage is $735.  just regular FHA loan, I didn't do the 203k

@Jason Hirko That's reasonable.  I can shoot for that.  Thanks for the input

@Trevor Ewen Thanks, I'll check out that article.  I'm trying to figure out that balance now haha

Jassem A. · Answer

I have 0% reserves. It can be a little more difficult but not impossible if I can keep it to one or two projects at a time.

Derek Montes · Answer

This is something I've wondered. I was thinking to keep ~15% of value in reserves for maintenance, but this would obviously have to be built up.

What was cost of the multi unit? Age? Size? Cost of repairs? Rent per unit? Vacancy? Was the loan anumber FHA203K?

Mark Douglas · Answer

@Jason Hirko  I do, $92k mortgage

Cash Reserves per Property??

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