How do you determine how much reserve cash to keep on hand?

Question

I'm buying my first triplex and I definitely want to save all profit for the first year or so to pay for repairs and such. How should I figure out how much is enough?

Nathan Gesner · Answer

There's no set formula. It depends on a variety of factors. If you are a heart surgeon making $400,000 a year with no debt, replacing a $7,000 roof isn't a big deal. If you're a blue-collar worker making $50,000 and carrying $20,000 in debt on cars and credit cards, a $7,000 roof can be devastating.

It also depends on the number of units. If you have one unit, a two-month vacancy can kill you. If you have 30 units and they're all cash flowing, two months of vacancy can be easily covered.

How old are the rentals? If you have apartments that are 70 years old, like I do, then they will require more maintenance than a condo built five years ago where everything is like new.

Starting out, I think it's prudent to hold 3-4 months of rent as a reserve. As you add more units, that amount can drop. If you have 20 units that rent for $500 a month, saving three months of rent for each unit would be $30,000 and that may be over-kill. I have 20 units and hold $10,000 as a reserve. Most of my maintenance and capex is covered by monthly cash flow so I don't have to dig into my reserve. I also have a very healthy credit card and solid income that can back me up if a catastrophe hit and I have to expend my entire reserve.

Sit down and crunch the numbers. It's a very personal thing.

Terrell Garren · Answer

Great answer by @Nathan G.

An investor quote I like - There should be no unexpected expenses, only unexpected timing.