Cash Reserves for your rental? How much!

5 Replies

Hey BP!

I know when analyzing deals, its critical to account for vacancy %, repairs %, CapEx to cover costs. Is there a rough estimate that anyone is aiming for?

For example, if I did a remodel on a home and replaced electric, plumbing, Hvac and cosmetic, I would look to have ~5k in cash reserves. Whereas, if I did not replace big ticket items and just did some minor cosmetic work, I would estimate around ~10k in cash reserves. 

To be more specific, assume you're self-managing, the property is within ~1hour of where you reside. Does anyone have some thoughts, or am I missing anything. I am not looking for exacts as every property is different. I am looking for an estimation. 

@Eric Dami this is not an exact science. It depends on your financial strength, the quality of the property, how many properties you own, etc.

I like to start with one major expense and three months of vacancy. If a unit rents for $1,000 a month and a new roof would cost $8,000 then I would save up a reserve of around $11,000.

If you are a cardiologist with almost no debt and making $250,000 a year then maybe you don't even need a reserve. When bad things happen, maybe you're able to spend $20,000 without much impact on your personal budget. But if you are living paycheck to paycheck, carrying debt, or your job is questionable, then I would definitely insist you save up a reserve fund.

What if you have an apartment complex with 20 units? Do you save three months of vacancy for each unit and $50,000 for the roof replacement? That would be around $90,000 sitting in a savings account! At this point, I would recommend having a line of credit to cover these things so you don't have money sitting in the bank doing nothing when it could be put to work.

I have 20 units and my reserve is only $20,000. I plan to get rid of that reserve soon and replace it with a line of credit. However, I also don't carry debt except for my personal home and investments, I don't live paycheck-to-paycheck, and my properties are cash-flowing well enough that I could divert all income to handle the problem.

The point is, you have to sit down and assess your position personally and with your investments and determine what kind of safety net you need.

I don’t think there’s a magic number at all. I really like what Nathan had to say. If you’re in a situation where you’re strapped for cash… The thing I would be looking at is why I am strapped for cash. No matter how good your properties cash flow if you don’t have the discipline to be able to keep your  hands out of the cookie jar you will continue to have problems no matter how prosperous you are.

I just had a situation where I had to get a permit for existing remodel, and new electrical panels. I did most of it with credit so I could keep $10K liquid cash. If nothing happens, I'll pay the cards off quickly with incoming rents. But if something does happen where credit is not an option, I still have cash.

If anyone is interesting in hearing about my permitting process and all it involved, feel free to reach out. It was a learning experience to say the least...all because of one disgruntled tenant.