Cash needed for first rental?

Question

Brian Ellis · Answer

I just bought my first duplex, I was advised by @JD Martin to have at least 10k in reserves. Im glad I took his advice, because immediately I had to deal with some unexpected costs. Renovation is about 1k more then I had anticipated (which isn't bad). But I will also have the month of October vacant in one unit.

The two weeks leading up to the closing, I was hit with some unexpected costs with my dog where he needed surgery. So that cost me about $1500. I was always concerned about having reserves for the house I was buying, but completely disregarded reserves for life outside of RE. Now I know why it is so important, because I may have been in trouble if I didn't take those extra steps to save more.

JD Martin · Answer

Thanks for the shout-out @Brian Ellis!

Keep in mind that reserves doesn't necessarily have to be cash on hand. It can be access to low/no interest credit cards, a HELOC, a personal loan to yourself from a 401(k), a wealthy relative, etc. Cash is great but if you have healthy income you don't have to let the lack of a big bundle of bills stop you from getting started - you just need to know that if you ran into a problem, you could access the funds to take care of that problem, and you could pay those funds back in a controlled way without skipping your mortgage payments or having to go to a soup line for awhile.

When I first started I kept a pretty good chunk of cash on hand - I've always been a bit of a money hoarder anyway - but at some point when the business ran itself I didn't have to do that any more - and, in fact, just hanging on to cash at .005% interest was counterproductive to building wealth. I still have access to plenty of liquid assets, but I don't worry about keeping $X amount per door any more. Also, part of what you need depends on what you do with the places. Since I do full rehabs on our homes, my expenses going forward are pretty minimal and high-dollar emergencies just don't happen. I had to do a heating system this year on one house, but I knew that I would at some point in the future back when I bought it so I just assumed it as a budget item then. But if you put on a new roof, then you're unlikely to have that as a "surprise!" repair.

Steve Vaughan · Answer

Yep, I like @Brian Ellis advice of $10k.  I am good with 5% of PP here for reserves, but am afraid to say that if you are buying OH $40k places.  $2k would not be enough.  A roof or major mechanical replacement is not all the sudden less because the property costs less, so the % marker gets majorly skewed.

When you inspect the actual property you will have a better idea of what to have set aside for Cap Ex and other reserves like repairs and vacancy.

Jake Robers · Answer

You may also want to consider having more in reserves for the fourplex than you would with the duplex. During the property showing, take notes on what needs repair/rehabbing since this would affect your reserve amounts.

Steve Vaughan · Answer

Thanks, Brian.

I save a lot on repairs and transactions, but not by being minimalist.  The reason I can save so much is because I have a large storage space in the back of one of my buildings (that my PM co rents from my bldg entity, of course) full of basically everything I need to keep me going.  I can literally not go to HD or Lowe's for years except for new larger scale rehabs.  Far from minimalist but I like where you're heading!

Brian Ellis · Answer

I try and follow you @Steve Vaughan I might have to pick your brain on how to save more! Im already becoming a bit of a minimalist

Brian Ellis · Answer

There is no such thing as having too much saved up, that's what will create opportunities for you.

Set a price point with keeping the reserves number set in mind, I wouldn't compromise too much. I wanted the duplex for 240k (with 10k in reserves) and I settled at $242500. It was listed for 260k, but I was firm on my price. At the end of the day I compromised a total of $625 out of my reserves for the down payment. And the numbers still looked great. Anything more than $242500 I would have walked.

Michael Kistner · Answer

@Joshua Ferguson

As a rule of thumb I like to have $5K a door in reserves. You'd be surprised at how quickly that can go in one bad month. I do know some investors that feel comfortable with having $1,500-2,500 in reserves. Starting out I'd recommend having more. Once you have a rental for a while and have made some repairs you should have a better idea of what to expect in terms of repairs. At that point you can decide if you can risk having a little less one or two months if going for that next property. Hope that helps!

- Mike

Cash needed for first rental?

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