Investor · Pasadena, CA · Member since 2020 · 42 posts · 12 votes
I'm currently reading up on house hacking and how to analyze deals. I've read from multiple sources that you should save apart of your monthly cashflow for reserves in case of vacancies, repairs, emergencies, etc. My question... is it necessary to set aside money every month from your cashflow before taking a profit OR can you simply set aside a set amount of money at the very beginning when you buy the deal? Or is either approach fine? For example, let's say I want to invest in a $400,000 property and I have $24,000 saved up to invest. If my down payment is $14,000 (3.5% FHA loan) then what if I just put $10,000 aside in cash reserves from the get-go? Thanks!
@Connor Duff I don't see why setting aside reserves from the get-go wouldn't work. The idea is to have cash flow for emergencies and repairs. So as long as you have the funds, you should be a-okay. In fact, if you have the ability to do both, I would. Set aside X amount at the beginning, then add as you go. Best of luck.
@Connor Duff I don't see why setting aside reserves from the get-go wouldn't work. The idea is to have cash flow for emergencies and repairs. So as long as you have the funds, you should be a-okay. In fact, if you have the ability to do both, I would. Set aside X amount at the beginning, then add as you go. Best of luck.
@Marlen Weber Thank you for your response! I like the dual-method you proposed of setting aside some money at the get-co and then a certain amount every month. Better to play it on the safe side.
@Connor Duff This isn't an answer to your question, but a question of my own. Do you plan on saving a set amount each month regardless of how much is in your cash reserves? I'm looking to house hack this year or early next year. My plan is to put some initial funds in there and then contribute lower monthly amounts, but I'm wondering if I should also cap the total amount of money I put in there. If anyone else has some input - If the property is in solid shape with low vacancy rate, how much would be too much in a cash reserve when that money can instead be put towards earning money elsewhere?
Hey @Connor Duff, great question. I am also looking for a house hack opportunity and was asking myself the same exact question the other day. I am far from an expert but I would say it is not enough to just start with a cash reserve and it is necessary to set aside money each month for vacancy, repairs and cap ex. My thinking is that while it is really smart to start with cash reserves, I also want that bucket to fill itself back up when it inevitably does get hit with unexpected expenses.
@Connor Duff I agree with everyone else here saying that both strategies are great each time you are buying. In the beginning, it is good to have the reserves for the unexpected expenses that could happen both small and large fixes within the first year or just to renovate certain parts of the home. (BIG TIP, ask your agent/lawyer or look into how to make a contingency clause in your offer asking the seller to agree to pay for big expenses that are over $1000 for the first year. It will definitely help to reduce expenses in the beginning big time if there are any.) One scenario to always be prepared for is what if the funds run out due to any repairs or renovations and you did not set aside money for future expenses. We can't always know what will happen in the future with properties so it's always best to take expenses from the income.
Potential first time house hacker here as well. Could be wrong but I believe the monthly allocation is simply a way of accounting for the cash we will need to set aside on average to pay for ongoing maintenance, repairs, etc. If you're able to have that money set aside from the start, even better as some unexpected costs may just as well happen in month 7 (where you don't have much saved up) as month 249. I would tend to agree small lump sum at the start + small monthly contributions is likely a good strategy for most people.
@Sharon Ho Great question! So I think my plan will be to have money in cash set aside from the beginning (when I buy the property) AND set aside a smaller amount every month. The monthly amount might be less than what other people put aside because I'll have a nice cushion from the start. I don't know how much to set aside, but I've read that if you are buying an older property you should set aside more money and also if it is in a less-desirable location (as compared to a newer property and great location). I think to answer your question of is there an amount that is excessive to have in cash reserves should be answered by the location you are buying into and what other investors are doing in that area. Hope that helps and best of luck on your house hacking journey too!
@Shawn Burns I agree! After reading more into this topic, I think you're right that it isn't enough just to have a certain amount at the beginning set aside that you don't constantly add to. Especially since at first I won't be relying on that cash flow from the property to live off of. I plan on keeping my job for awhile, and so setting aside money from my cash flow is smart in case of an emergency.
@Andrew Delgado Thank you for the tip!! I remember reading about that type of contingency and definitely think that is smart to do! Maybe to get that contingency in place I put more earnest money down as a sign of good faith and that I'm serious about getting the deal.