How much cash reserve should I have per rental?

Question

Hello,

I'm brand new to bigger pockets. So this question question has most likely been answered already. But here goes!

My wife and I are considering buying a duplex. Built in 2004. We plan to use an FHA loan and 3.5% down. We hope to be able to buy a new duplex every year or two. We will put each duplex on 15 year mortgages. If we are able to continue buying properties we could end up with 10-15 duplexes in the next 15 years. But with that many houses there are bound to be tons of things that need fixed and repaired.  Like a roof, floor, drywall, general cleaning and rehabbing every time a tenant moves out. So here's the question.

With all the potential repairs, how much cash should I have available for repairs per duplex?

Stephanie Dupuis · Answer

I like to start with $5,000 in reserves and then I add to it monthly from the property's CF until I'm at $10,000-$15,000. Then I start using the extra CF for other investments. What I do. Interested in hearing what others do.

Peter Tverdov · Answer

I am more risk adverse than most on this forum but I prefer 6 months of PITI per property. I also allocate 8% of my rents towards a maintenance account which covers repairs and my capex usually (sometimes I have to pull a little profit towards a major capital improvement). I self manage and my vacancy rates are 0.

I am reading and talking to more and more people who are playing with fire IMO. Claiming they just use a HELOC or CC as reserves and if something goes wrong they will just use those credit lines (ignoring that credit lines can be frozen). You don't know what you don't know sometimes and I find it concerning that people literally have $0 cash with multiple mortgaged properties under them and seem fine with it.

Andrew Johnson · Answer

@Erik Howard You're asking a couple of different questions, one is about a budget for repairs and one is about reserves.  Reserves aren't just for repairs, they're also to cover vacancy, paying for lost eyes, etc.  Just the random maintenance stuff that happens with properties, even if nothing is actually "broken" that needs a repair.  You also need to factor in cap-ex expenses.  Most people will use a percentage (like 10%) of gross rents to build that fund to inevitably use when an HVAC system breaks a roof needs to be replaced, etc.  The challenge is that those can cost $3K to $20K+ depending on which cap-ex item you're talking about.  If you have a roof with 3 layers of singles and that top layer isn't looking so good, you'd better be saving all of your cash-flow for cap-ex and (even then) it won't cover a full roof replacement.  But the latter is just an extremely example.  So while most lenders will want to see you have 6 months reserves it can be property dependent.  My personal opinion is that if you have 1 property you need higher reserves because you can't predict when those repairs or big expenses or just plain vacancy will hit.  Once you have 20+ units you'll start to see that every month SOMETHING breaks.  That every month someone has given their 30 day notice and you're spending money to take a unit "rent ready" (yes, that costs money too).  But the odds of all of those HVAC systems breaking in the same month?  Pretty much zero.  So at that point you can start to average out and have a communal fund that's small than each individual reserve fund would be.  And since you'll have 20 income streams you can replenish it faster than with a single property.  So you'll hit more "bumps in the road" but the cushion in is there.

Or you can just keep it simple and say:  6 months PITI + saving 10% per month for cap-ex expenses.

Aaron Lancaster · Answer

I have a high deductible ($10k) on my SFH rental, so I like to base my cash reserves on that plus 6 months expenses. So to keep it simple, if I have a $10k deductible and I rent the house for $1k, 50% of my monthly rent goes toward expenses so I'd save $10k + $3k for a total of $13k.

Barry H. · Answer

ERIK - I have been buying and self-managing SFH 13 years and also had a duplex in my past.  If you are in NJ, I cannot speak to boilers and heat systems since we have standard heat pump/AC combos out here in the desert.

That said, I like to use a general ROT (rule-of thumb) that my units will be rented out 10 out of every 12 months to asses what I need in reserves (it's just much easier to calculate Revenue with multipliers of 10).  Here's an example:

SFH 1200SF Purchase Price = $100,000

REVENUE (Rent) is $800/Mo ($8000/Yr) - remember, you are presuming 10 month occupancy

EXP (Annual or 12 months) = Debt Svc (Loan) $5000 Tax $500, Ins $500, HOA $1000  ($7000)

CASHFLOW CALC........Revenue $8000 - Expense $7000 = Cashflow $1000

CAP......$1000 / $100,000 = 1%

This shows you will make $1000/Yr on a $100K investment (before equity appreciation) which is 1% and not that great.  HOWEVER, that $1K by itself "might" be needed for repairs/maintenance etc, leaving you with ZERO cashflow unless you are 12 months occupied.  Yikes !!  But wait............

As long as you can do the above calculation and be at LEAST cashflow neutral (in this case you are 1% positive), then you can forget about worrying about reserves....OR....put whatever amount ABOVE your 10-Month rule Revenue comes through the door into your reserve/savings account.

In other words, by using the 10 Month formula, the last 2 months of rent ($1600) will either be your true profit or your rainy day reserve money in the event of a bad tenant change-out, unexpected repair etc.  You can put $150/Mo into reserves if you want to do it monthly to start creating your reserve/profit account (that's what I do).  At the end of the calendar year, I see money in that reserve and it totally feels like a tax refund - whoo hoo !! :-)

Erik Howard · Answer

@Peter T.

Thank you for your thoughts. I think I will do something similar to what you are doing. I can't imagine not having cash on hand for those things.

Adam Christopher Zaleski · Answer

I have two single family homes. I have about 10K saved for each property. I rehabbed both properties when I purchased, so I am not anticipating any large repairs for a few years.

How much cash reserve should I have per rental?

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