How much cash reserve is too much?

Question

Hello BP,

Curious about something. Most of us have heard about the 50% rule, or saving a % of gross rents for things like repairs, capex, PM, vacancies, etc. At what point do you determine you have enough cash saved up? Having a big wad of cash in a bank account certainly provides a level of security, but it doesn't have a great return.

Assuming one does not touch what has been saved, is there a threshold where you start funding other areas with a stronger ROI (buying new properties, paying down mortgages, investing in the stock market, etc.).

I realize this would be different for someone who owns 5 properties vs. someone who owns 100, or someone who owns rehabbed properties vs. someone who owns properties that will need a lot of work, but I'm interested in everyones thoughts on the subject.

I've been very blessed to grow from 0 to 13 properties (mostly all rehabbed) this past year and plan to continue to grow very quickly, but, I want to make sure I'm doing it strategically, and intelligently!

Frank Wong · Answer

Hi CJ,

It all depends on what you have in outstanding loans on your 13 properties.  I go with 8 months PITI (principal interest taxes insurance) for your total outstanding debt.  This should be your reserves for your portfolio.

I have 2 separate real estate accounts.  1 is my purchase fund.  When that account gets large enough for my next purchase I know I am ready to buy another.  I also have a just in case of an emergency fund.

The more savings the better.  You never know what opportunity might present itself or a market turn.

Bjorik Mutize · Answer

@CJ M.

Maybe I’m going to get kicked for this. But the more cash reserves you can budget out the better! Especially budgeting out without jeopardizing your property operations/business growth.

I know the recommend minimum thresholds, but I personally do not think there is too much.

Scott Passman · Answer

@CJ M.My goal is to keep enough cash reserves to cover ~6 months of mortgage.  At this time, I only have 1 rental property so I want to make sure I keep solid cash reserves in case of unexpected vacancies or large unplanned expenses.  As you said, this ties heavily into a person's risk tolerance and goals.  I should also specify that for now I think of cash reserves as an "emergency fund" for the property, so I count this separately from the money I set aside for repairs/cap ex.  I am taking a more conservative approach, but with a young family and only 1 investment property I want to make sure I keep myself in a strong position to handle unexpected setbacks until I gain enough assets to give me more flexibility.

Josue Vargas · Answer

Definitely depends on how many REI properties you have.  This is the way I calculate my reserves for properties I have owned for more than 5 years.

For less than 6 properties, I estimate my big item expenses (roof, water heater, paint, carpet or floors) taking consideration the age of each times that commonly required replacement.  I have these expenses/costs (CapEX) already included in my rent, so that does not count towards additional reserves!  I like to have an additional reserve of 15% of my calculated CapEx, but ideally shooting for 20% of the overall costs.  I think unexpected things happens, and we have to be prepared to absorbed the cost and keep the business alive.

Tim Houzenga · Answer

Personally, I like to keep eight months of PITI per house.  My houses are in the 40-70K range with traditional 20% down 30yr amortization loans.

Eight months worth of reserve is usually enough buffer if I’m in a pinch. Mind you I’m not a major player with large amounts of units.  Bigger players most likely will have a different philosophy.  Real estate is so niche and situational.  Best of luck!

Theresa Harris · Answer

I think it depends on your risk tolerance.  The biggest thing is you have access to funds for repairs and unexpected costs.  That can mean things other than cash: line of credit, credit card, etc. If you don't use cash, make sure the debt is paid off quickly.

CJ M. · Answer

@Frank Wong

Thank you Frank. All my loans are recent as I just got into REI this past year...but it sounds like I'm on the same page as you!

CJ M. · Answer

@Scott Passman

Thank you Scott. Makes sense!

How much cash reserve is too much?

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