Cash Flow - Does having a "Reserve Fund" change the calculation?

Question

Background:  I have a rental property that I self-manage with great tenants that is recently remodeled.  I personally lived in this property for 3 years, and the tenants have been there for almost a year.  I’m keeping an eye on the math to decide if I want to keep it as a rental property, or sell it in the next year or so and invest elsewhere...  As one data point in my decision, I’m looking at cash flow.   I also work a full time W2 job.

My Questions:

1. Once you have an adequate “reserve fund” in place (which I feel that I do), what expense items should still be calculated into the cash flow?

• I’m currently using:  Cash Flow = Monthly rent – Mortgage – CapEx (5%) – Vacancy (5%) – Repairs (5%)
• However, besides the mortgage, I’m not really having regular expenses and so that set-aside money is just building up in the reserve fund (yay!).
• At this point, I feel the reserve fund would cover several months of vacancy and cover any major repair issue short of complete disaster (yes, I have insurance).
• At what point should I just consider the money I’m setting aside for CapEx, Vacancy, Repair as part of the cash flow?  I want to use it toward something else – to buy more doors.  (Obviously if I dipped in the reserves I would have to add that set aside back in for a while to re-build it…)

2. What do you consider an adequate “reserve” fund?

Melanie Lashus · Answer

Thanks Bjorn!  Appreciate your feedback.   I read Brandon Turner's book on Managing Rental Properities and used all the BP advice on tenant screening - and it landed me amazing tenants in this first go round.  I'm hoping they'll stay for a couple years!

Bjorn Ahlblad · Answer

@Melanie Lashus congrats on both your doing and your thinking! Really puts you ahead of the pack. I include all the expenses and set asides plus mortgage payments for 6 months as a minimum. Through this time I actually have accumulated more. Equally important as reserves is upping your base requirements and your screening, a bad tenant can chew through any reserve fund in a hurry. All the best!