General Landlording & Rental Properties

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Anthony Phillips
  • Realtor
  • Lebanon Tennessee
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Cash reserves held for each of your properties!

Anthony Phillips
  • Realtor
  • Lebanon Tennessee
Posted Jul 31 2022, 11:44

So I was wondering what sort of reserves everyone keeps on there properties. I know most people are saving a percentage of the rent for vacancies and cap ex. When you do get a property bought and rented are you keeping a set amount in cash for possible vacancies or repairs. For example a few months of the mortgage and some for a repair until those reserves are built up off of your cash flow. I plan on initially trying to keep 6 months of mortgage payments and a few thousand for a decent repair equaling about $15,000. I am wondering if that is too much or too little. Seems like a lot to be in an account and not working but on the other hand I will always have the safety of it being there.

Thanks yall!

Nashville, Tennessee

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Sergey A. Petrov
  • Real Estate Consultant
  • Seattle, WA
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Sergey A. Petrov
  • Real Estate Consultant
  • Seattle, WA
Replied Jul 31 2022, 11:54

Wild variables here depending on your personal financial situation. 6 months of all operating expenses (including debt service) is very conservative. 2 months might be ok. Personally I don’t segregate “reserves” on a per property basis.

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Anthony Phillips
  • Realtor
  • Lebanon Tennessee
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Anthony Phillips
  • Realtor
  • Lebanon Tennessee
Replied Jul 31 2022, 12:27
Quote from @Sergey A. Petrov:

Wild variables here depending on your personal financial situation. 6 months of all operating expenses (including debt service) is very conservative. 2 months might be ok. Personally I don’t segregate “reserves” on a per property basis.


Yah wild variables here I know. I do only have my personal residence and my one rental that I just got rented. On the search for another. I was thinking more like 2-3 months knowing worst case I need to do some repairs after a tenant moves out or an eviction. So in your portfolio you have a certain percentage or amount that you keep that covers everything as a whole?

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Bjorn Ahlblad
  • Investor
  • Shelton, WA
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Bjorn Ahlblad
  • Investor
  • Shelton, WA
Replied Jul 31 2022, 12:38

I aggregated the reserves into one account that now has 50k available for whatever properties need it and I have more as required. I am retired so there are no mortgages.  

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Sergey A. Petrov
  • Real Estate Consultant
  • Seattle, WA
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Sergey A. Petrov
  • Real Estate Consultant
  • Seattle, WA
Replied Jul 31 2022, 12:43

I have very very little in just plain cash sitting in a bank account. If I were to guess, it is probably about a month and a half to 2 months. Everything is invested or leveraged. No situation requires a substantial amount of cash in 24-48 hours. I use 30 days as a rule of thumb where i have enough time to liquidate investments (stocks, bonds, mutual funds, etc). But I also have a sizable line of credit should push come to shove and I can’t cash in the investments on a 30 day notice… mostly everything gets covered by the recurring monthly revenue stream. Currently working through a $70k+ sewer line repair and a $30k+ roof project. That’ll need some liquidating unless i can get the contractors to carry a zero interest note for 6 or so months…

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Nathan G.
  • Real Estate Broker
  • Cody, WY
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Nathan G.
  • Real Estate Broker
  • Cody, WY
ModeratorReplied Jul 31 2022, 16:09

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.

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Richard F.
  • Property Manager
  • Honolulu, HI
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Richard F.
  • Property Manager
  • Honolulu, HI
Replied Jul 31 2022, 19:43
Aloha,

I would add that a critical factor is the type of investing you are involved with. Specifically, if you are in long term rent and hold (and especially if those are multi-family properties), you should establish reserves for specific major elements of each property, to minimize impact when expected maintenance needs to be scheduled. For example, if today, you have three properties with roofs of varying ages, such as near new; 10- 12 years; and nearing end of life, you estimate today's cost to re-roof each property, divide by years until that is expected, and put that amount into a named reserve account each year so that you do not need to borrow. Exterior painting, same scenario. Sewer line, water heater, or interior supply lines, do the same. If you want to update a room or an entire unit in a future year, put numbers to it and start funding now. You cannot always count on getting a loan, or having extra funds from another property, etc. By establishing reserves, you are planning, which will, in the long term, reduce stress and expenses! It will also help ensure you do not overlook significant maintenance on key components.
Obviously, for short term holdings, or flips etc. there would be no need for this, as you should be able to operate within your scheduled property income.