Financial Reserves When Starting Out in Real Estate

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Financial Reserves When Starting Out in Real Estate

Philipp Grajewski
Investor · NC · Member since 2020 · 9 posts · 7 votes

Hi there,

My wife and I are new to the site. We are in awe of all the information and resources that are available through this community. A big thank you to all the members and contributors to this awesome site.

We have been devouring as much information on real estate investing as our schedules allow. We currently own a house that we will be holding and renting out, as soon as we move in a few months. We are debating whether we should invest in a second property at this point. We are considering BRRRRing a small multi-family or single family house.

At this point, we are unsure of how much cash one should have in reserve before getting into it. You hear of people starting out with basically nothing, financing 100%, but that seems very risky. We do have some cash reserves, as well as money in an IRA.

What rules of thumb/calculations have you used to determine at what point you are financially ready to invest in the next property?

We look forward to hearing about your experiences.

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Christopher Tyler Hughes
Investor · Chattanooga, TN · Member since 2014 · 11 posts · 9 votes
6y

@Philipp Grajewski This is a question I hear a lot and the answer depends on who you ask and your risk tolerance. My first investment I had to put 20% down on the purchase, and that was all the money I had. Halfway through the rehab, a $5,000 unexpected expense occurred, which forced me to do a lot more work on the property than I had anticipated. It was a tough 3 months, because I had zero liquidity, however I turned a $45,000 profit on the deal. 

Now.... I was 24 years, not married, no kids, and working a job that didn't make much money. So in my mind, I didn't have much to lose. It was an easy decision for me, but your situation may be different. 

I don't think there is a "rule of thumb" when you start... at some point you just gotta jump in. I wouldn't necessarily recommend doing what I did, but if you have some reserves and a good deal approaches, don't let it slip away. 

Think about how much money you could be walking away from because you were concerned about being at that right number for reserves! Good luck man!


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  • Alan Feldman
    Eastern Shore MD · Member since 2018 · 139 posts · 79 votes
    6y

    That's the beauty of REI, there are so many ways to invest, so many variables, so many levels of risk, you can decide when and how to invest. Being ready to invest can be a combination of funds and knowledge.

    In my case, my goal is to get a below market 4 plex that ARVs for $200k, fund 20% of the loan, make $200 per door in profit, and have multiple options for next steps in 4-6 years.

    1Reply
  • Dave G.
    Investor · Phoenix, AZ · Member since 2016 · 349 posts · 418 votes
    6y

    @Philipp Grajewski

    Regarding cash reserves, I highly disagree with having nothing and have personally realized the risk of this aggressive pursuit, which for me (many years ago), was essentially having to dump multiple properties because my situation with no reserves was unsustainable. Note also it was in combination with properties that had very little cash flow (poorly forecasted maint expenses).

    Reserves are not an exact science since you are planning for uncertain events, but there are elements to consider that will drive the estimation. They include the subject property's condition, the age of the property and the type of property. I rent condos, so they all have an HOA that covers a significant portion of ownership costs including capex (e.g. roof replacement, exterior paint, etc). If you have a duplex or fourplex versus two or four SFRs, then you only have one roof to replace (although possibly a bit bigger roof) versus multiple roofs for SFRs. When you start accumulating multiple properties, you may to choose to increase your reserves at a decreasing rate if you have some scaling with your increased door-count. There are many factors.

    Some specifics for me: my biggest risk in AZ is having to replace an air conditioning unit. For my properties, it costs $4-5k each to do that. I have 6 properties and have already replaced one unit. My units are 25 years old and it's highly likely I'll have more near-term replacements required. But it's not likely all 5 will fail at the same time. But I should budget reserves to absorb a couple simultaneous replacements to be safe. So right now I keep about $15k in reserves as a steady state. I also have good cash flow, so that is an additional buffer. If you have marginal cash flow, then to me that emphasizes further the need for stock reserves set aside and ready to tap. 

    Good luck to you.

    1Reply
  • Christopher Tyler Hughes
    Investor · Chattanooga, TN · Member since 2014 · 11 posts · 9 votes
    6y

    @Philipp Grajewski This is a question I hear a lot and the answer depends on who you ask and your risk tolerance. My first investment I had to put 20% down on the purchase, and that was all the money I had. Halfway through the rehab, a $5,000 unexpected expense occurred, which forced me to do a lot more work on the property than I had anticipated. It was a tough 3 months, because I had zero liquidity, however I turned a $45,000 profit on the deal. 

    Now.... I was 24 years, not married, no kids, and working a job that didn't make much money. So in my mind, I didn't have much to lose. It was an easy decision for me, but your situation may be different. 

    I don't think there is a "rule of thumb" when you start... at some point you just gotta jump in. I wouldn't necessarily recommend doing what I did, but if you have some reserves and a good deal approaches, don't let it slip away. 

    Think about how much money you could be walking away from because you were concerned about being at that right number for reserves! Good luck man!


    2Reply
  • Philipp Grajewski
    OP
    Investor · NC · Member since 2020 · 9 posts · 7 votes
    6y

    Thank you! Those are some great insights. I appreciate you all chiming in. This gives us a better idea what more experienced investors are looking at.

    2Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    6y
    Originally posted by @Philipp Grajewski:

    At this point, we are unsure of how much cash one should have in reserve before getting into it. We do have some cash reserves, as well as money in an IRA.

     As a general rule of thumb after purchase, I like to have 3 months PITA in reserves if self-managing.  5 months if with a PM.  

    If rehab is needed or there are obvious cap ex items coming soon, the 3-5 months is above the cap ex/ rehab costs.  

    Once I got into the dozens, or folks that have communities have a set amount of reserves, like $30k+. More of a portfolio reserve than a per property one. 

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