How much do you keep in reserves for each house hack- turned rental property?
House Hacking Specialist · Denver, CO · Member since 2016 · 411 posts · 396 votes
How much do you keep in reserves for each house hack- turned rental property?
Most Popular Reply
MI · Member since 2018 · 12 posts · 4 votes
3yI keep 6 months PITI for each property. I also try to knock out any upcoming maintinece issues and budget for looming capex when I purchase a property. I have access to several lines of credit.
I keep all of my reserves in a savings account earning 5.25%.
Another consideration is how much steady W2 income that you have to supplement repairs and maintinence as issues arise.
21 Replies
- Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes3y
@Ben Einspahr, I don't have a set amount. I do BRRRR, so I start with a rehabbed property in good condition and I budget for cap ex, maintenance and vacancy. I budget 12-13% of incoming rent which is a little below the 15% I used to conservatively underwrite deals but I am able to beat my 5% vacancy rate goal and my maintenance is usually low the first few years after the rehab.
Also, as an emergency fund, I keep a small LOC against one of my properties. I can use that in a pinch and also could tap it if a deal pops up that I want to take down that I wasn't capitalized to go after.
Also, to your point about $100k sitting idle. You could invest that money in a CD and get a better rate of return. If you ever needed the money you should be able to get a bridge loan against the CD. Talk to your bank about that. This way money doesn't sit idle. CD's are paying 5% these days I believe.
I intend to start doing that with my property tax monies. I do not escrow with my mortgages. So, I need to budget for property taxes which causes money to sit idle. Now its getting to where its enough and rates are high enough for me to make a little money before tax bills are due.
- House Hacking Specialist · Denver, CO · Member since 2016 · 411 posts · 396 votes3y
@Kevin Sobilo Is the LOC against one of your properties a HELOC?
@Julien J. how much of the $100k would you invest into the debt fund?
- Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes3y
Quote from @Ben Einspahr:
@Kevin Sobilo Is the LOC against one of your properties a HELOC?
@Julien J. how much of the $100k would you invest into the debt fund?
Yes, the LOC is a HELOC against one of my investment properties. It was my first investment property and I got to the point where the small mortgage was paid down to about the same amount I was keeping in reserve! So, I paid off the mortgage and took out the HELOC and saved myself all that mortgage interest while still having the HELOC to use as an emergency reserve.
Also, as I have stated I can use it to go after a deal if I need to. I did do that back in July 2020 when I found a nice deal at a time I wasn't actively looking for one. So, the HELOC allowed me to jump on it right during COVID.
- Investor · CO · Member since 2016 · 757 posts · 1k+ votes3y
Quote from @Ben Einspahr:
@Kevin Sobilo Is the LOC against one of your properties a HELOC?
@Julien J. how much of the $100k would you invest into the debt fund?
Depends...
Let's take a 10 property portfolio w/ properties in good shape with/o any planned major Capex w/in a year.
-Debt Fund: Lets day I'm vested and w/ the ability to take the funds out quarterly.
-Let's say I have $200k+ HELOC potential @ ~8% variable
I'd keep $20k-$30k handy @5% w/the banks. In my 16 years of investing, I never had to come up with more than $15k in less then 2months.
- 3yAlecia LovelessPro MemberMember since 2019 · 3k+ posts · 2k+ votes
@Ben Einspahr I had about $45K between my properties but “borrowed” a little to purchase my last property with the full intent of paying it back. I now have about $30K. I have additional funds elsewhere that could be used in case of an emergency. Ideally I’d like to have about $50K with the additional funds sitting tight elsewhere in an interest bearing account.
- 3yTanner PileBusiness MemberReal Estate Broker · Colorado Springs, CO · Member since 2019 · 388 posts · 326 votes
When house hacking it's hard to save up for down payment and reserves right off the bat when purchasing your first one. I would do 3 months or less because you could be waiting for a while to get started if needing 6 months reserves.
I've personally done 1 month or less in reserves before to get started on my next deal.
Tanner Pile4.931 Reviews - House Hacking Specialist · Denver, CO · Member since 2016 · 411 posts · 396 votes3y
Quote from @Tanner Pile:
When house hacking it's hard to save up for down payment and reserves right off the bat when purchasing your first one. I would do 3 months or less because you could be waiting for a while to get started if needing 6 months reserves.
I've personally done 1 month or less in reserves before to get started on my next deal.
@Tanner Pile, I agree 100%. Very challenging having that upfront cash reserves right out of the gate after all closing expenses/ furnishings/ reno and could delay you significantly. Looking back at my first house hack, renovations took longer and were more expensive then originally anticipated. Who would have thought?!?!
However, when I was exiting HH#1 and moving on to #2 I was pretty set on the 6 month reserves for that property before exiting. Again, goes back to the investors risk tolerance.
- Real Estate Agent · Austin, TX · Member since 2020 · 1k+ posts · 941 votes3y
For my house hack, my goal is 25k after I moved out. While I lived there I was saving so much money on my mortgage I didn't need to think about it. I am probably on the high side but I don't want to fund that account ever again and I'm confident I never will at 25k.
- 3yJake AndronicoBusiness MemberRealtor · Reno, NV · Member since 2019 · 1k+ posts · 938 votes
Great question. I've gone as low as 1-2 months reserves, but do not like being that low.
Typically 6-12 months is ideal, just in case.
- Cleveland, OH · Member since 2022 · 811 posts · 578 votes3y
Ben,
This is a great thread. I haven't done my first investment yet but I'm preparing for an early summer 2024 purchase. My plan over the next several months is to continue saving reserves to hit that 6-month of reserve mark. On top of the money, I need to save for my down payment, closing costs, etc.
Going to have to cut back this year but it's all about delayed gratification!
Thanks for sharing your experience.
Best,
Ben
- 3yScott TrenchPro MemberRental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votesThis is a fantastic, responsible, reasonable question. Great job for asking it.
Quote from @Ben Einspahr:
I was at a meetup the other day, and we were discussing the question, "How much should I keep in reserves for each rental property?". So I figured I would post it to hear everyones feedback
My quick and simple answer is 6 months of PITI (Principal, Interest, Taxes, and Insurance) or $10,000 in reserves for each rental property. Which ever is greater. K.I.S.S.
To date, I still still use this metric. For context I have 3 rentals. Are there times when I dip under that thresh-hold? Yes!
However, there is a tipping point at which this rule of thumb no longer applies. For instance, if you have ten rental properties and $10,000 in reserves for each property, that amounts to $100,000 sitting idle in a checking or savings account. For me personally, that is too much and I would rather redeploy some of that money into other investments. How much money is too much depends on the individual.
Question for the BP community? How much do you keep in reserves for each rental property?
I think it’s something like $10,000 for the first property or two, and $5000 per property after that. (Or 6 months PITI / 3 months PITI, whichever is greater).
As my portfolio grows, however, and I have other diversified assets, like stocks and a personal emergency fund, the importance of getting a formula for this amount diminishes. - MI · Member since 2018 · 12 posts · 4 votes3y
I keep 6 months PITI for each property. I also try to knock out any upcoming maintinece issues and budget for looming capex when I purchase a property. I have access to several lines of credit.
I keep all of my reserves in a savings account earning 5.25%.
Another consideration is how much steady W2 income that you have to supplement repairs and maintinence as issues arise.
- Accountant · New York NY, USA · Member since 2023 · 209 posts · 26 votes3y
It sounds like you have a practical and reasonable approach to determining reserves for your rental properties. The 6 months of PITI or $10,000 threshold is a good starting point for ensuring you have sufficient funds to cover unexpected expenses and vacancies. Your consideration of a tipping point where this rule might no longer apply makes sense as well, especially when you have a larger number of properties.
When it comes to reserves for rental properties, there isn't a one-size-fits-all answer, as individual circumstances and risk tolerance can vary. Some factors to consider include:
- Property Type and Age: Older properties might require more maintenance, so you might want to have a larger reserve for them.
- Market Conditions: A volatile market or a downturn might warrant having higher reserves.
- Geographic Location: Different areas have varying costs of repairs and vacancies. Properties in areas with higher costs might need more reserves.
- Personal Financial Situation: Your personal financial stability and risk tolerance will impact how much you're comfortable keeping in reserves.
- Property Management: If you're using a property management company, they might have recommendations for appropriate reserve levels based on their experience.
- Property-Specific Factors: Unique features of your properties, such as specialized equipment or unique designs, could impact your reserve needs.
It's also a good idea to periodically review and adjust your reserve amounts as needed. As your portfolio grows and your financial situation changes, your reserve requirements might evolve as well.
As for the question you posed to the BiggerPockets community, you can expect a wide range of responses based on the factors mentioned above and individual experiences. Some landlords might follow a similar guideline to yours, while others might have more or less stringent criteria for their reserves.
Ultimately, the key is to find a balance that aligns with your risk tolerance, financial goals, and the unique characteristics of your rental properties. It's great that you're engaging in discussions and seeking feedback from fellow investors to refine your approach.
- Cleveland, OH · Member since 2022 · 811 posts · 578 votes3y
Quote from @Scott Trench:
This is a fantastic, responsible, reasonable question. Great job for asking it.Quote from @Ben Einspahr:
I was at a meetup the other day, and we were discussing the question, "How much should I keep in reserves for each rental property?". So I figured I would post it to hear everyones feedback
My quick and simple answer is 6 months of PITI (Principal, Interest, Taxes, and Insurance) or $10,000 in reserves for each rental property. Which ever is greater. K.I.S.S.
To date, I still still use this metric. For context I have 3 rentals. Are there times when I dip under that thresh-hold? Yes!
However, there is a tipping point at which this rule of thumb no longer applies. For instance, if you have ten rental properties and $10,000 in reserves for each property, that amounts to $100,000 sitting idle in a checking or savings account. For me personally, that is too much and I would rather redeploy some of that money into other investments. How much money is too much depends on the individual.
Question for the BP community? How much do you keep in reserves for each rental property?
I think it’s something like $10,000 for the first property or two, and $5000 per property after that. (Or 6 months PITI / 3 months PITI, whichever is greater).
As my portfolio grows, however, and I have other diversified assets, like stocks and a personal emergency fund, the importance of getting a formula for this amount diminishes.Scott,
I see your footer says BP Podcast Guest on Show #223 but let's not forget #99!
I say this because I literally listened to that podcast about a week ago and put 2 and 2 together. It's admirable how far you've come!
Best,
Ben
- Cleveland, OH · Member since 2022 · 811 posts · 578 votes3y
Quote from @Andrew West:
I keep 6 months PITI for each property. I also try to knock out any upcoming maintinece issues and budget for looming capex when I purchase a property. I have access to several lines of credit.
I keep all of my reserves in a savings account earning 5.25%.
Another consideration is how much steady W2 income that you have to supplement repairs and maintinence as issues arise.
Andrew,
What kind of savings account do you have that can yield a return like that?
- 3yMichael SmytheBusiness MemberReal Estate Agent · Metro Detroit · Member since 2023 · 4k+ posts · 3k+ votes
You can use actuary tables, like insurance companies, to better manage your risk.
It's highly unlikely ALL your properties will be vacant or have nonpaying tenants (Eviction Moratorium aside).
Logical Property Management4.9454 Reviews - MI · Member since 2018 · 12 posts · 4 votes3yBen,
Quote from @Benjamin Sulka:
Quote from @Andrew West:
I keep 6 months PITI for each property. I also try to knock out any upcoming maintinece issues and budget for looming capex when I purchase a property. I have access to several lines of credit.
I keep all of my reserves in a savings account earning 5.25%.
Another consideration is how much steady W2 income that you have to supplement repairs and maintinence as issues arise.
Andrew,
What kind of savings account do you have that can yield a return like that?
I use Milli. They're a mobile only division of the First National Bank of Omaha. They're currently paying 5.25%. There are plenty of other options that are 4% plus as well If you don't like the mobile only format.
- Realtor · Erie · Member since 2022 · 194 posts · 88 votes3y
Quote from @Ben Einspahr:
I was at a meetup the other day, and we were discussing the question, "How much should I keep in reserves for each rental property?". So I figured I would post it to hear everyones feedback
My quick and simple answer is 6 months of PITI (Principal, Interest, Taxes, and Insurance) or $10,000 in reserves for each rental property. Which ever is greater. K.I.S.S.
To date, I still still use this metric. For context I have 3 rentals. Are there times when I dip under that thresh-hold? Yes!
However, there is a tipping point at which this rule of thumb no longer applies. For instance, if you have ten rental properties and $10,000 in reserves for each property, that amounts to $100,000 sitting idle in a checking or savings account. For me personally, that is too much and I would rather redeploy some of that money into other investments. How much money is too much depends on the individual.
Question for the BP community? How much do you keep in reserves for each rental property?
Hey Ben, I use the same rule of thumb and up it even to a year PITI if the investor has only a small handful of rentals. Typically under 3.
I appreciate your perspective though about having a safety net for each property and after scaling past 5 I feel like the rules can change up a bit. It's still important to have money aside for each investment though in my opinion and depends on many factors of how much should be set aside.
Thanks for asking! - 3yTheresa HarrisPro MemberMember since 2019 · 15k+ posts · 11k+ votes
I don't have a set amount. I have enough in my bank account to cover rent if I have multiple vacancies as well as cover repairs and access to a LOC if needed.
- Cleveland, OH · Member since 2022 · 811 posts · 578 votes3y
Quote from @Andrew West:
Ben,Quote from @Benjamin Sulka:
Quote from @Andrew West:
I keep 6 months PITI for each property. I also try to knock out any upcoming maintinece issues and budget for looming capex when I purchase a property. I have access to several lines of credit.
I keep all of my reserves in a savings account earning 5.25%.
Another consideration is how much steady W2 income that you have to supplement repairs and maintinence as issues arise.
Andrew,
What kind of savings account do you have that can yield a return like that?
I use Milli. They're a mobile only division of the First National Bank of Omaha. They're currently paying 5.25%. There are plenty of other options that are 4% plus as well If you don't like the mobile only format.
Sweet. Thank you!!
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