How much should I save up before purchasing a rental?

Question

Hello, I am new to the group and just started listening to the BP podcasts. I have been blessed with 8 single family rentals through inheritance. All of these rentals are paid off so there is no debt in this equation. I want to take this blessing and continue to expand on it by adding to my portfolio, but want to do so in the smartest way. So, how much should I have in savings for the rentals before buying another property? I would also welcome any advice on reading material or otherwise that would help me getting started in general. Thanks!

P.s. I have hired a property management company for these properties.

P.s. I have hired a property management company for these properties.

Nathan Gesner · Answer

There are a lot of variables to consider. Are you still working a W-2 job? Are you financially secure? Are the homes recently renovated or are they 60 years old with some deferred maintenance?

Let me give you a couple examples:

Investor A owns 30 rentals, fully paid for and producing $20,000 cash flow each month. He is a heart surgeon with an annual income of $650,000. He has no personal or business debt.

Investor B owns three rentals, all with mortgages and producing $1,200 cash flow each month. He has a W-2 job with an annual income of $70,000. He has three kids, a mortgage on his personal home, he still has three years to pay off his wife's car, and the oldest child is going to college next year so they are on a tight budget.

A furnace needs to be replaced immediately ($5,000). One of the tenants didn't pay rent for the last two months and the house is trashed ($10,000 in losses). A third home developed a roof leak and is due for a new roof ($12,000).

Investor A can pay the $27,000 in expenses without batting an eye. Tenant B is going to be borrowing money or selling some organs on the black market in hopes of staying in the game.

Each investor has a different tolerance level. You must evaluate your personal situation and determine how much you need to set aside. You may want 3-6 months of rent income when you have one rental home, but it wouldn't make sense to save that same amount for every home if you had 30 of them. I have 34 rentals, strong cash flow, strong W-2 income, and my personal finances are strong so I only maintain about $20,000 and I rarely dip into it.

Joe Funari · Answer

@Chris Read for my rentals located in Ft. Worth I always keep a reserve of $3K per property per year for maintenance that will arise. Also, if your looking to purchase additional rental properties you will need to put down 20% + closing costs. This will help you avoid PMI too. I would also suggest you reach out to @Andrew Postell to discuss options for pulling the cash out of your current portfolio to help you add additional rental properties. Andrew is a fellow investor and a guru on giving you options you may never considered with the scenario you've given us. Also, as far as getting additional knowledge I would recommend you attend local REI club meetings. The networking and experience you will gain from other investors is invaluable. My favorite is DFW REI Club. Reach out to @Cindy Carriger to get more info. She runs the club and has forgotten a lot more about REI than I have ever learned over the years. Cindy and Andrew have been a great help to me in my REI journey.

Andrew Postell · Answer

@Chris Read thanks for posting!  Always great to hear from a fellow Texan.  Bigger Pockets does have some good state specific forums and Texas is their most active forum.  Feel free to post there if you ever need some more "local" advice about things.

You do have some good comments above.  Generally speaking you'll have "loan requirements" and "investor standards" that will come into play here.  It is true that a loan might want you to take 6-12 months of your monthly mortgage payment and your monthly tax and insurance expense.  So if your taxes were $8000 per year and your insurance was $6000 per year then that total amount would represent 12 months.  1/2 of that total would be $7,000.  So while that amount might be fine for a loan...it might not be recommended as an "investor" since you have no mortgages.  Meaning, if you had a mortgage payment, your reserve requirement would be significantly higher for a loan....and that would cover just about any need.  So if I'm using an "investor" rule of thumb, like the one @Joe Funari recommended, that would be $24,000.  That would be a lot safer and probably be a better amount to use really.  $7,000 would not be recommended...even if that's all you "needed" to qualify for a loan.

Now your downpayment might be a different story.  Some lenders will only need 15% downpayment while some others might need 25% down.  So getting prequalified is EXTREMELY important.  Or at least speaking with a lender on this at minimum.  A good lender should be able to tell you your options (and how those options affect your loan) without pulling your credit.  I wrote a pretty good post on how to find good lenders for Bigger Pockets that you can read HERE.

Feel free to reach out with any other questions.  Thank again for posting!

Matthew Crivelli · Answer

If you're sitting on a bunch of equity you could take out a HELOC or preform a cash-out refi on one or multiple properties and use the cash to buy more. Not all debt is bad debt.

Cody Neumann · Answer

@Chris Read

It is typically best to have enough for a down payment plus 6 to 12 months or reserves for rent.

Bud Gaffney · Answer

Depends. Can always take out a HELOC if needed

Basit Siddiqi · Answer

@Chris ReadI would use the lender's method to determine how much you need to save up.Have the down payment, closing costs + 6 months of reserves.

Wale Lawal · Answer

Here are all of the cost associated when purchasing a home. Hope this helps!

https://www.bankrate.com/mortg...

Drew Sygit · Answer

Interest rates are at historical lows, so if you borrow, lock in a low rate for as long as possible.

A HELOC is ONLY good for accessing funds short-term - think of it as a credit card against your properties. Interest rates are predicted to go up next year, which means HELOC rates will go up. For short-term borrowing that is fine, but or long-term borrowing - lock in the rate!

Chris Read · Answer

Thanks Nathan. I have a strong W2 job and only debt is personal home mortgage. The homes I currently own are older (most in the mid 60-70's) so I know repairs and upkeep are going to play a big role. Good part is, I have been managing 2 of them for about 5 years and the rest for one year and have made many big repairs already. I know taking the next big step into purchasing will always be a risk, but I am trying to gauge between risk and recklessness. Haha

How much should I save up before purchasing a rental?

Most Popular Reply