What is a Safe "Reserves" level for a rental?

[Kristopher Kelly]

Hello again BP Fam, 

I am trying to decide the proper nest egg for a condo I have in Delaware. I was wondering what yall keep in the savings account for your properties and how you determine it from property to property? I have a 1000 sqft condo in Delaware with a fridge, dishwasher, microwave, stove, washer, dryer, water heater, furnace, and AC unit. All of these items added up currently to replace would be 15,750. So do you just have that as the reserves and call it a day. I understand everything can not all break at once but is this still the way yall run the net egg number? I know I need to save for ongoing repairs, cap-ex, and vacancy but that is taken out of the monthly rental income and put into the nest egg on top of the 15,750. I thank anyone for any help yall can give me and I appreciate this community so much! 

P.S.- After writing down how much everything costs to replace at once I honestly feel a lot better and less overwhelmed. 

[Nathan Gesner]

This is not an exact science. It depends on your financial strength, the quality of the property, how many properties you own, etc.

I like to start with one major expense and three months of vacancy. Imagine if you had one single-family home. The tenant fails to pay their last month's rent and leaves the place needing new flooring and paint. It will take two months to turn it around and get it rented. That's three months of mortgage and utilities, the cost of flooring, and the cost of painting. That's a pretty common scenario and could cost you $10,000 - $15,000 so that would be a good starting point for your reserve.

But there's more!

What if you're a cardiologist with no debt and making $250,000 a year? You could probably afford $20,000 without much impact on your personal budget. If you're a single mom with student loans, a car payment, and living paycheck-to-paycheck, then $20,000 would be devastating and a reserve is critical.

What if you have an apartment complex with 20 units? Do you save three months of vacancy for each unit and $50,000 for the roof replacement? That would be around $90,000 sitting in a savings account! At this point, I would recommend having a line of credit to cover these things so you don't have money sitting in the bank doing nothing when it could be put to work.

I have 33 units, no debt except for mortgages, and excellent income. I can pay for all my problems using the cashflow from my current rentals. I also have a $175,000 line of credit at the ready if something catastrophic happened. A reserve is unnecessary, but I still keep around $15,000 - $20,000 in my account.

The point is, you should sit down and assess your personal finances to determine what the worst-case scenario may look like, how much you would need to cover it without impacting your life, and whether you will need to build a reserve.