Lender · Charlotte, NC · Member since 2022 · 739 posts · 410 votes
4y
Hi @Account Closed, a good rule of thumb is 10% maintenance, 10% vacancy, and 5% for capex. Obviously, you can adjust this to your market but if you want to be conservative, this is a good place to start.
Hope this helps! Let me know if I can be of any assistance.
Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
4y
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.
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