Typical reserve requirements?

6 Replies

I'm just getting into property management as my mortgage business has started to slow down over the last couple of months.

For those of you in property management (or even landlording), how much cash reserves do you expect your owners to keep in the bank account for unknown expenses?

I was thinking 4-6 months, but maybe I'm way off base.

Thanks in advance,

Jeff

That's a good rule of thumb. I usually assume 20% of the gross rent roll for vacancy & repair.

When you say "in the bank account" do you mean in the property management company's bank account? or just that the owners have funds available? I doubt you'll find people willing to keep a lot of $ in an escrow account under your control, but I think it's reasonable to talk with clients about their reserves so you don't get unpleasant surprises later.

My current PM doesn't have me keep any reserves with him, expenses are taken out of the monthly cashflow and my account is "zeroed out" at the end of each month. If there is something that requires more funds, he calls me and I send a check. This is on a multi-family so there's a decent amount of cash going through each month. I could see how that might not work all the time on a single family.

When we were renting out my late mom's condo, that PM kept a small float of around $500 for minor repairs. That worked fine too.

Our PM in Kansas keeps a $100 balance.  If there is something over a few hundred I get a call asking how we want to handle it.   

One of my houses needs a new roof so I'm saving every rent check to get that taken care of.  Normally 3 x rent is what I like to keep for each house.

As a lender, you should know about form 998; but here is a link that puts out a few ways to set reserves:

http://www.biggerpockets.com/forums/432/topics/867...

Now, a property manager requires a real estate license (or broker license) in many states, so don't forget that ..,

Property managers could require something like $100 in their acct. It is not the PM's job to monitor the owner's reserves.

Our property manager requires $300 per property kept on account.  Any expenses above that are taken out of the monthly rent and they replenish the $300 being held back over the following couple of months.   If the expense is large (we just had the heater fail), we are sending the payment directly to the HVAC company.

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here