Cash reserves per unit

3 Replies

Hey guys and gals,

I just purchased 2 single family houses and a duplex to go along with another duplex I currently own.  I'm just curious how much cash I should try to keep in reserves at all times in order to deal with any major repairs/vacancies that may arise. I haven't heard anyone talk about a good guideline for this (i.e., keep X amount per unit in reserves at all times).  What are your thoughts??

Thanks in advance!!
Ben

Obviously, the answer will depend on the condition and age of the properties, as well as the amount of risk your comfortable with.

My lender requires 6 month's worth of payment reserves for each property in order to lend.

This is very conservative! But at the same time, I feel very comfortable when I have this in place, and I am always ready to jump at the next deal I find.

The 3 places are a bit on the rough side but are all currently rented. We plan on collecting a few months rents and then chipping away at some of the projects. I have heard of the 6 month requirement before and luckily we have that already in place. I just didn't know if most people planned to keep 5k, 3k, 1k, etc per door in reserves as they grew or how close people cut things. 

Originally posted by @Ben Rasche :

Hey guys and gals,

I just purchased 2 single family houses and a duplex to go along with another duplex I currently own.  I'm just curious how much cash I should try to keep in reserves at all times in order to deal with any major repairs/vacancies that may arise. I haven't heard anyone talk about a good guideline for this (i.e., keep X amount per unit in reserves at all times).  What are your thoughts??

Thanks in advance!!
Ben

Reasons for having reserves vary: 

1. Things wear out and need to be replaced over time... look up expected life-times for the major components, mechanicals and components... and how many years you have left on these.  For example: roof, hvac, plumbing, electrical, appliances, decks/fences, floor covering, windows/doors. Set aside money for replacement on schedule. Here's a good link:

http://www.atdhomeinspection.com/advice/average-pr...

2. Things get damaged by tenants... do thorough tenant screening and obtain sufficient security deposits to cover damage. Also, the wrong tenant can cost you much more than the typical security deposit, especially if you need to do an eviction (non-paying tenants who hold over and legal costs.)

3. Turnovers and vacancies cost money... do what you can to minimize tenant turnover. When you have a turnover, act fast to qualify a new tenant for the unit but don't skimp on your standards. A vacant unit will cost less than a unit occupied by the wrong tenant. Plan for some vacancy loss (no rental income and paying for utilities when a unit is vacant.)

4. Natural disasters and catastrophic damage from accidents... maintain appropriate and sufficient insurance for the properties and for your liability. Be proactive, establish and maintain safety standards, create an emergency preparedness plan. Require tenants to have Renters Insurance.

Marcia Maynard, Fischer Properties | Podcast Guest on Show #83