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Updated over 3 years ago on . Most recent reply

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Jessica Flint
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How to calculate reserves

Jessica Flint
Posted

My portfolio is growing and I need to get more organized.  I currently have 9 doors and 2 more pending.  I've started making an excel spreadsheet to calculate pure cash flow for each month, so I know what I'm actually making.  I save 20% of my gross rent every month; (5% for vacancies, 5% for repairs and 10% for cap ex.)  My question is, if I gross $1100 rent on a property, spend $100 on random utilities, small repairs, etc. do I subtract those expenses from my 20% before depositing into my long term savings? For example, I normally would deposit $220 for repairs, vacancies and cap ex.  Would I subtract $100 and deposit $120? I want to have an accurate calculation of what I'm earning.  Thanks for the help!

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Nathan Gesner
  • Real Estate Broker
  • Cody, WY
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Nathan Gesner
  • Real Estate Broker
  • Cody, WY
ModeratorReplied

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. Imagine if you had one single-family home. The tenant fails to pay their last month's rent and leaves the place needing new flooring and paint. It will take two months to turn it around and get it rented. That's three months of mortgage and utilities, the cost of flooring, and the cost of painting. That's a pretty common scenario and could cost you $10,000 - $15,000 so that would be a good starting point for your reserve.

But there's more!

What if you're a cardiologist with no debt and making $250,000 a year? You could probably afford $20,000 without much impact on your personal budget. If you're a single mom with student loans, a car payment, and living paycheck-to-paycheck, then $20,000 would be devastating and a reserve is critical. 

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 33 units, no debt except for mortgages, and excellent income. I can pay for all my problems using the cashflow from my current rentals. I also have a $175,000 line of credit at the ready if something catastrophic happened. A reserve is unnecessary, but I still keep around $15,000 - $20,000 in my account.

The point is, you should sit down and assess your personal finances to determine what the worst-case scenario may look like, how much you would need to cover it without impacting your life, and whether you will need to build a reserve.

  • Nathan Gesner
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