What Hurricane Irma Has Taught Me About the Importance of Cash Reserves

I live in Southeastern Georgia on the coast, which was undoubtedly impacted by Hurricane Irma. This included mandatory evacuation, temporary work closure, and scrambling for portable food and available hotel rooms. During the week-long ordeal, the constant barrage of images of torrential rain, flooding, and downed trees created a sense of gloom about what I would find upon finally returning home. Likewise, I had similar concerns for the tenants and properties of my rental portfolio in Jacksonville, Florida—further south and therefore more exposed to the effects of the hurricane.

I feel very fortunate to report that, relatively speaking, we came out of this ordeal with manageable damage both to my own home and my rentals. I define "manageable" as no significant flooding, no direct hits from trees, and no need to file insurance claims. Nonetheless, the following communication from my turnkey provider/property manager attests to the fact that I will be facing some unusual financial challenges over the next couple of months, which prompted me to write this blog.

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Letter from My Turnkey Provider

Hurricane Irma's Impact on My Tenants' (and My) Finances

When we screen our tenants, we are very strict on verifying that their monthly income is three times the rent. With an average rental rate of approximately $1,000, this translates to a minimum requirement of $36,000 gross annually. In most cases, our tenants' household income is in line with the national median household rate of approximately $57,000. Their jobs include bus driver, dietician, and retirees working part-time. These are good, salt-of-the-earth people, but they're also not necessarily able to withstand a significant short-term cash flow crunch.  

When you factor in that many of the tenants have missed five days of work or more and have extra hotel and food expenses, you can see how they might quickly exhaust their savings. 

So, not only am I faced with the dilemma of half of the tenants or more having payment issues over the next two months, but I also have elevated expenses related to tree pick-up and minor structural damages. Combine this with my debt service, and this is likely to be the first time in over three years of ownership that I will have to feed my portfolio as opposed to receiving its usual cash flow. Given the relatively measured pace of my property acquisition and prudent use of leverage, it is a position I never thought that I would be in.

This underscores the often-repeated mantra that I have read on this site and heard on the podcast: If you're going to be in the landlord business and survive long-term, you need to have adequate cash reserves. Roofs wear out, HVACs die, pipes burst, and yes, hurricanes happen.

The exact amount of reserves is a matter of debate, as I have heard amounts advocated ranging from as little as $500 up to $10,000 per property. Personally, I allocate $1,000 per property, which has always been more than sufficient in the past, but will be tested during this whole ordeal. Obviously, I am hopeful that the disaster relief rent program will eventually help, but I certainly can’t count it happening in a timely manner, if at all.   

How much in reserves do you set aside? Has anyone had their rental portfolio affected by Irma or other natural disasters in a significant way?

Let's talk below.