How do you budget and breakdown initial seed money

Question

Hello All,Still learning here so please bear with me!Assume I have finally gotten to the point I have $30,000 saved up and feel ready to get my feet wet in this RE game. I obviously can't use the entire amount as a down payment; because then I'll have nothing in reserve for any initial repairs or issues.So how do you decide ok X% of this will go towards down payment, and X% will go towards reserves?

Nathan Gesner · Answer

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.

Michael Shenouda · Answer

@Chris Webb This is a good idea, I will definitely keep that in mind. @Nathan G. This response is fantastic! Thank you so much for the detail! Like I said, still learning, this is alot to take into account, and invaluable advice @Nicholas L. I'm still in the learning stage, Evaluating properties, etc. I am definitely more on the "stand-alone" side.

Dan White · Answer

Depends on the deal you are looking to do. If you did a hard money loan - they will want some skin in the game money for your first couple deals.A standard mortgage will cost you some money in EMD and the closing costs can be rolled into the loan. So let's say you find a deal on a house for 100k and the ARV is 150k and it needs 15k in reno.Also assume it will take 30 days to fix. You get a hard money loan for 90% of the 100k and you have to fund out of pocket for the balance and reno. Hard money loan at 2 points and 12% interest rate. You aren't a realtor I assume, so you will pay to sell it when done. You be out of pocket 25k of your 30k and deal is very lean even though you bought it at 66% of ARV. There are multiple lenders on here with loads of different programs. Some will fund the reno too.That is a flip type scenario. With 30k to play with - I would look at rental homes and start working on cash flowing. Keep building your equity.

Nicholas L. · Answer

@Michael Shenouda OK. The reason is I ask is that with a house hack I think you can take on a little more risk. If it's a stand-alone investment property you really and truly need reserves for things that break. Especially in Pittsburgh.

Nicholas L. · Answer

@Michael Shenoudaare you buying a stand-alone investment property or are you considering something like house hacking?

Michael Shenouda · Answer

Thank you so much for this! I appreciate the detail you went into. Having numbers really helps paint a picture.

Chris Webb · Answer

I would ask a lender this question, they are the ones giving you the loan. I am sure a lender is on here and might answer, but if you work with one ask them.