How much should to keep in reserves?

4 Replies

Ever since I started investing I have been putting 100% of every penny of cashflow into reserves.

I work full-time and live off my W2 salary and I don't touch my investments.

I'm at the point where I would like to start re-investing my cashflow into either more properties or paying down debt. 

Since I have been putting 100% into reserves, I don't know any different as to how much I should actually keep to be safe.

My guess is it depends on the condition of the property and how much you believe will be coming up in capital expenditures. 

I'm not new to investing, but I am new to re-investing cashflow and I haven't found much if any info on what a "safe" amount of reserves would be. 

Is it a formula? Is there a general rule? 

The age and condition would be the biggest factors when considering how much money you need in immediate reserves.  If your dealing with newer properties your repairs should be very little but you might have the occasional hot water tank that needs replaced or a couple $100 repairs here and there.  If your properties are older you would need to consider the right amount based on the age of roof, furnace, AC, windows, appliances, etc.  

Good question that I'd like to hear responses to as well. For example, the duplex I bought in January has brand new HVAC on both sides and 3 year old roof, and upgrades to interior 3-5 years ago. I've labeled $5k as a good base for reserves. But, like you, I'm not actually spending any reserves right now because of good W2 job. 

What's your exit plan....

If you have say a 30 year roof that's 10 years old and you're going to sell it in 10 years or less... then maybe you don't need to factor in a new roof as if you were going to keep it say 20 years. 

Another thing, I plan on keeping my property rent ready but not upgrades. When I exit, then I'll do upgrades to make it match current market trends... I probably would put this on a credit card with no interest for a year... rather than use reserves.

I'm a big fan of using credit as a option for reserves to augment cash on hand.... if the situation makes sense. That cash can often times be put to a better use than sitting around in the bank.