What's the best level of cash reserve to keep on a rental property on which there's a mortgage? Is it based on resale value, insurance deductible, gross/net income, or something else?
It depends on the type of property and how much you're cash-flowing.
My houses were typically SFR's 2 or 3 bedroom/1.5 bath houses under $100K in value, so I tried to keep $2K to $3K per house based on maintenance and vacancy rate.
But once I got to over 10 properties it started to matter less since you get a bit of an economy of scale. It's rare that a lot of major repairs happen at once. Plus with that many properties there's usually enough cash flow to covers most repairs.
I find it best to have access to capital through Lines of Credit (i.e. HELOCS, Business Lines of Credit, Credit Cards) though just in case you need access to money.
@Wendy Black a lot of this depends on what type and condition of property or portfolio you are reserving for. For instance, if it's a brand new constructed duplex you can probably get away without much. If it's a single-family home built in 1920 that has a lot of deferred maintenance you should have a very high amount of reserves.
But if you're just looking for a few 'rules of thumb' here's a couple.
-4% of portfolio value
-6 months of cash expenses
So for example, let's say you have one rental property worth $100k that you rent for $1000/month. Your mortgage/taxes/insurance payment is $800/month.
The first rule says keep .04*$100k or $4k liquid in a checking account and don't touch it for anything else.
The second rule says $800*6= $4800 in the checking account.
You should also add to this a certain amount of monthly rent for a capex reserve, say 5%. So each month you add another $50 to that checking account.
You can see where if you had a brand new duplex you might not spend anything for the first 5 years. And at that point you now have $7k in the checking account.
But if you have the 1920's house with deferred maintenance and month 1 you have to spend $3k to replace the furnace and $5k the second month because tree roots are in the sewer lines you would be sunk.
Bad things happen in threes , have enough in reserves to cover worse case times 2