Cash Reserve Question

[John Gambone]

Hello Everyone!

I have a couple questions that I would like to get more experienced people's thought on about Cash Reserves on SFR and Multi-Family units. And more specifically when to cap your reserve account and put the monies into cash flow and making more deals.

I am currently looking into two different types of properties that are on the opposite sides of the spectrum from each other. One is a FSBO SFR I am looking to buy for $30K and the other is a 12 unit Multi-Family from an associate of mine.

The NOI calc I am using on both has the following:

Monthly Mortgage Payment

Taxes

Insurance

Management Fee (10%)

Maintenance Cap-Ex Escrow (3.5%)

Vacancy allowance (8.125 %)

Utilities (Water and Garbage paid on the MF)

After all my expenses my cash flow per month on the MF is $1,500 and the SFR is $220. I would love to get opinions on if/when I should put a cap on my reserves (Maintence and Vacancy) and put the cash used on them into cash flow and more deals to help scale my business.

Thanks in advance for reading and your thoughts! Happy Monday!

[Bill Gulley]

SFR should go to the rule of thumb used by lenders, 6 months PITI, but from your point of view, it will vary depending on the age and condition of a property. If a roof has 15 years shingles and it's 19 years old, you could have a roof job next month!

Cash reserves also include an owner's ability to borrow, getting to other sources of funds for emergencies and being able to carry short term debt.

Multi, 5+ units are more to condition and net worth along with reserves and that is considering the debt coverage ratio, a minimum of 125%, better at 175% or more. 6 months PITI is still valid, that may well move out to 12 months as a compensating factor.

Compensating factors are those aspects of the property, net worth, income and management experience that may out weigh a borrower's lacking in other areas.

With any rental, you should have some sort of maintenance schedule, anticipating repairs and improvements. This goes to the condition and age assessments. Old HW heaters, HVAC, roofs, electrical and plumbing condition and keeping with code requirements. Knowing  about when these aspects will become applicable can tell you the costs to expect and from that, your savings necessary to meet those future needs. Failure to keep funds on hand or lacking the ability to borrow or to cover borrowed funds can put you out of business.......like bankruptcy.

Other than that, reserves are an individual matter, what is acceptable for one in some property may not be the same for another. :)