Cash Reserves for Rentals?

3 Replies

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?


@Wendy Black

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.

Create Lasting Wealth Through Real Estate

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

Start here