How much of a bank roll do you recommend?

Question

In a previous tread (What does it take to be successful) the following was stated:

"Like any business the number one way to increase chances of success is to be well capitalized. 
Everyone talks about getting into RE with no money but the reality is your chances are probably 1-10% if you do that.

If you have a good bankroll that allows you to put money down on property, pay for rehabs and make a mistake or 2 your odds of success go up to 50, 60, 70% or more." Eric Michaels

My question is how much Capital do you recommend or need to get started "on the right foot" in REI? 10K? 20K? 50? 100.....?

As a newbie in REI, I'm consuming as much knowledge as possible. My wife and I have good equity in the assets we currently hold. But is it enough too get us started right?

J Scott · Answer

It's not just cash you have, it's cash you have access to.  Donald Trump was once about $1B in debt, but by having access to that money, he made (and lost and then made again) a fortune.

In terms of how much you need, here's the way I look at it -- a typical rehabber who is pretty good at what he does should be able to generate about 30% ROI per year while he's still operating on a small level (at a bigger level, ROI will drop).  So, if you have -- or have access to -- $100K, you should be able to generate about $30K per year after all expenses.  If you have access to $1M, you should be able generate about $300K per year after expenses.

With rental properties, a typical landlord these days should be able to generate about 15% cash on cash return with not too much effort or risk in many parts of the country.  So, with $100K, a landlord should be able to generate about $20K per year.

How much do you want to earn?   That should help you figure out how much you need...

Bryan Hancock · Answer

It certainly does depend on a lot of things.  One of the main things which J referenced above is the ability to find capital to grow.  Debt capital from lenders will require you to have solid financials to keep borrowing.  Debt capital from private lenders likely doesn't carry this requirement.  Equity capital is either deal-specific (as in a JV arrangement with active investors) or requires one to know how to raise money, which generally requires a nice track record.  Equity is certain forms can be pledged as collateral or borrowed against.

Yet another factor is how stables one's current cash flow is.  If you are working a nice job that spits off a lot of extra cash each month you can afford to take on more risk in your portfolio and "bet on some appreciation."  There are tax-related benefits to owning property.  You also amortize debt each month, which is a nice forced savings plan.

If you choose to buy houses subject-to to rent long-term your cash needs drop drastically as well because the down payments cited above go away.  The tradeoff is that you will likely won't get discounts that are as steep as you would with cash purchases.

I could go on and on and on.  The answer is that it depends on a ton of things.  I would caution you to stay liquid though.  This is one of the pieces of advice almost every successful investor that I have met gives me because they have seen the cycles and people go bankrupt taking on too much leverage.

Steve Babiak · Answer

PITI = Principal, Interest, Taxes and Insurance

PITI is essentially the mortgage payment you make if you have Taxes and Insurance going to escrow with the lender.  So PITI subtracted from the rent is your monthly remaining cash flow - assuming no other expenses, which unfortunately isn't the reality of things - there will be expenses beyond PITI.

Jon Holdman · Answer

Depends on what you want to do.

For rentals:  Enough for the down payment, rehab and capital reserves.  Assumes you buy deals that have real cash flow, not "rent - PITI" phony cash flow.

For fix and flip:  Depends on how much you can borrow.  You need enough cash, from one source or another, to buy, fix and hold the property.

For wholesaling:  Enough for marketing and meeting with sellers.

Raymond B. · Answer

Chad McDaniel,

I suggest that you click on this link, to use as a Guide, with your investment rentals:

http://www.biggerpockets.com/forums/52/topics/18371-help-me-understand-this-deal-and-5-2-rule

Raymond

Leo Kingston · Answer

I agree with J Scott and others. It's not just about your cash reserves, it's about your borrowing capacity. The key is having access to cash at reasonable rates, meaning not hard money.

James H. · Answer

It really does depend on a lot, but for planning purposes, 20K seams to hit the mark for me in regards to cash needed to successfully secure a buy and hold propert. Below are a few expamples of how that money is used:

Investment property A
Purchase price 50K
Down Payment 10K
Rehab 7K
Reserves 3K

Investment property B
Purchase price 70K
Down Payment 14K
Male ready, light rehab 3K
Reserves, 3K

Investment Property C
Purcase Price 80K
Down Payment 16K
Make ready 2K
Reserves 3K

Invesment property D
This expample I move into new property and convert current home to rental
Purchase Price 120K
Down Payment 4K
New houseware funiture and appliances 12K
Reserves 4K

These are the type of deals I focus on in blue collar neighborhoods in my area. Other investors migh have numbers that are way different depending on many factors, but the way it usually washes out for me is that a round 20K is ideal.

As you can see, as the purchase price increases, I alot less for rehab. Reserces are someting I am more flexible on and in some of those scenarios, I would even dip down to 2K in reserves figuring I will be building reserves back up right away.

Now, I got into my first rental with 12K. but it is not as good of a property as I would normally want to buy. However, it is almost paid off and will be within 18 months of purchasing...so I was willing to deviate from my target.

Jeff S. · Answer

"My wife and I have good equity in the assets we currently hold. But is it enough too get us started right?"

If you have good equity chances are you can access cash through credit lines.

You need 2 things: 1) Cash for upfront repairs before rented or resold. 2) Ability to pay loans and expenses while property is vacant.

Chances are if you can qualify for financing then you are better off than someone buying with down down who has no money.

If you have a example of what you are considering there are plenty of people here who will analyze and make suggestions.

Good luck

Chad McDaniel · Answer

Thanks James!

Chad McDaniel · Answer

Hey Jon,

What percentage do keep back for capital reserves? and Also what is "rent-PITI"? I am mainly looking at rentals at this point and time. Single family up too 4-Plexs. Not too say I won't flip one or two. I like the idea of Buy and Hold for the long term.

"For rentals: Enough for the down payment, rehab and capital reserves. Assumes you buy deals that have real cash flow, not "rent - PITI" phony cash flow."

How much of a bank roll do you recommend?

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