Cash Reserves for Rentals?

[Wendy Black]

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?

Thanks.

[Jeff Kehl]

@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.