How much to keep in reserves
I have a three family in Attleboro, Ma. It approximately cash flows 1k a month after expenses. Right now I am putting all profit into a reserve account. How much do you guys have saved for reserves? I was going to stop at around 15k. I know they say that you should save 1-2% of the property value a year to go towards vacancies/ repairs but I don’t want to have 30k sitting making no money. I figure if I come across an expense over 15k (roof/ foundation/ ect) I can easily get a loan for the remaining balance. What do you guys recommend?
A lot of investors feel the FNMA reserve requirements are arduous and too conservative, so they just check that minimum box, since it knocks out BOTH the requirements to get additional loans, and is more in reserve than they'd otherwise keep anyways.
For folks with 1-4 properties, it's 6 months of payments for the subject property + 2% of outstanding loan balances.
I save 3 months of gross rents. The more properties you have, the more you can skimp on this number. The purpose of reserves is liquidity, so if you can get access to a HELOC you can use that instead of the cash reserves. That won't help you with your lender when you go to buy new properties, however.
@Casey Dimascio, this also highly depends on the condition of your property. You more or less know what condition the house is in and if any large ticket items (roof, furnace, remodeling) are coming your way. If those are in a pretty good state, I would say 3 months your rent should suffice. I totally agree with Wesley above that the more properties you have, the more reserves you will have, and easier it is to maintain as you can always use each of those reserves wherever needed. I have 4 properties and have 3 months or reserves in each. whenever I have a big item coming up (had to replace a hot water boiler in one of them for a cost of 8k), I start anticipating in advance.
Hope this helps.