STR Strategy? How much should I have in reserves?

Question

Hey All,

I have a few STR/MTR properties in Phoenix and I have never touched any of the rental income. Have just kept it in the bank accounts. Anyone have any opinion on when its "ok" to start using profits to pay for some of my personal expenses? How much in reserves should I have?

Thanks!

Chris

John Underwood · Answer

6 months minimum. Also you need to be putting back money for when you need a new HVAC or roof.

Jon Puente · Answer

Hey Chris,

In my opinion, I think 6 months of reserves is low, especially when having a few properties.  I would aim for 12 months of reserves.  I think anything above that would be excessive, but it depends on your level of riskiness!

If you know you can produce income at a high level and are not afraid of next months paycheck, then you can go lower on reserves.  However, if you see a storm coming in the horizon, then I would stack up as much as you can until it passes.

Great Question!

Drew Sygit · Answer

3-6 months of PITI reserves for each property should be enough.

Nathan Gesner · Answer

It's a personal decision.

My original goal was to build a reserve.

Then I wanted to be financially independent, meaning I could stop working for the rest of my life and just live off the cashflow.

I still enjoy running my business and have no intention of retiring, so I continue to use profits to purchase new investments. Since I know the income will support me forever, I am now focused on increasing earnings so I can be more charitable with the ultimate goal of $200,000 per year to charity.

You have to figure this out for yourself.

John Carbone · Answer

I’m currently in aggressive expansion mode, so currently no actual reserves. I have several years of operating expenses in investment reserves I can sell if needed to cover though. Also, both myself and my wife work, and individually we can each cover expenses on all properties in a month if needed assuming 0 revenue comes in on the rental income. I’m at about a collective 65 percent ltv on my mortgages at 3-4 percent. So current reserves I’m month to month but several backup plans if things go south.

Eliott Elias · Answer

Hold 3 months of reserves and spend the money whenever you want.

Leslie Anne Morris · Answer

In general there is a balance that tips once you have too much money sitting in a non performance method (ie cash).  6 months is good, some carry less some carry more.

Brooklyn McCarty · Answer

6 months is kind of a gold standard, but this also depends on how many properties you have.

Chris Risi · Answer

Thanks for the detailed layout of your plan! In general, you always hear people, escpecially on bigger pockets talk about financial freedom, meaning have enough rental income to at least cover all of their life expenses. But no one every really talks about this topic. At what point can you start taking this as income? Hence the forum question..

V.G Jason · Answer

I'm bidding on my first rental of likely three this year. For each of the properties, I will reserve 7 months worth of fixed cash of their estimated rent amount + $10k-$15k for capex. Higher if it's older, lower if it's less. I will also set aside 8% for vacancy and capex monthly, and am accounting for upfront property management, vacancy period from start entirely separately. I also have set aside $30k that is going to be distant from any specific property, as a cushion against the three.

Once I accrue more properties-- say closer to between 5 to 7. I will raise reserves to 9 months fixed cash on each, plus 1 month variable(equities) & replenish any capex account that has been touched. I will also set aside another $45k that's distant, and I can tap into incase any of the properties need something. That monies right now is being held as an extra reserve incase something happens for the first three as we enter a really precarious time.

My risk tolerance is much lower than the average stretch you out, leverage yourself buyer. I'm also investing with a completely different purpose, it seems to me at least, than others.  I don't intend to touch any rental income, until I've built the portfolio up deeper and have had consecutive years of flow.

STR Strategy? How much should I have in reserves?

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