How much should I keep in reserve

[Dan Grove]

Hello all, 

I have the opportunity to buy more than one property but wanted to make sure I have enough money in reserve for problems with the rehab, longer time to get a tenant, etc.  I am going to budget money for vacancies, repairs, cap ex, and PM.  On the one hand I want to make sure I have enough money extra available during the initial process in case there are any issues.  On the other, I don't want to hold too much capital back that could be used for other projects if they come along. 

The simple question is, how much money do you hold back for each project as a percentage of the esimated all in cost.  For example, if I estimate a cost for the house plus the rehab of 100K, how much should I keep in the bank just in case?  

Thanks,

Dan

[Nathan Gesner]

Quote from @Dan Grove:

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.