When can I buy again?

[Devin La Croix]

Hello, I’m a relatively new investor, I recently bought a duplex last February 2024, I live in one unit and rent the other. If I were to rent both sides I would come up ahead $250 after all expenses. I’m currently working towards another rental property (duplex or larger) but I know I still need funds. The next property will be another owner occupied. I’ve saved enough for a down payment, but I’ll be left with only a little bit for emergency funds. I’ll basically be counting on my tenants to pay on time everytime. Im not sure if that’s the way to go. When is it a smart time to reinvest? How much should I have for an emergency fund for each property?

[Nathan Gesner]

Quote from @Devin La Croix:

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 significant 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 typical 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 annually? You could probably afford $20,000 without much impact on your 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 cash flow from my current rentals. I also have a $175,000 line of credit ready if something catastrophic happens. A reserve is unnecessary, but I still keep around $15,000 - $20,000 in my account.

The point is, that you should sit down and assess your 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.