How Much to Keep Liquid?

[Colin Reid]

Hey, guys. I want to know how much money you keep available for contingencies on your SFR rentals.
I have two SFR's, with a third (current residence) to be rented within a year. With the two rentals, I've never taken a dollar out of the business, with the exception of repairs and maintenance. I don't manage them myself, and just stack up the cashflow for now. They each have about $17k saved from just cashflow. Rent check goes in, mortgage comes out, remainder sits. That comes to 18-24 months of mortgage payments for both properties, if they were vacant.

I'm looking at a possible cross-country move in a year, so I'm in cash-savings mode, and not looking to invest in property until then. At that point, I'm planning to house hack a multi-family.
The question is, how much of my roughly $34k (plus another year of cash-flow for each) do I need to keep in the properties for contingencies (cap-ex, minor maintenance, etc) and how much is available to put toward a down payment? Keep in mind, I have savings outside the business that I'll also contribute to the down payment, but this isn't about the amount I can put down, it's about how much to keep in reserve for the properties.

Thanks,

Colin

[Dale Lotts]

I recommend paying off any non-revenue debt first. Pay off the car, primary residence second mortgage (first mortgage if possible) and absolutely everything else that isn't generating revenue. This puts you in a much better financial position when unexpected expenses come up. 

Next, understand in detail what your insurance company will pay for regarding roof and other CapEx items. Often the roof will be damaged in some way covered by insurance so your out-of-pocket expense may be just the deductible. You cannot count on insurance paying to replace the roof, but you should know what is covered and how it works. Some thing you should know are: When is the roof covered by replacement cost vs cash value, how does color matching shingles factor into partial roof replacements (which may lead to entire roof replacements), which shingle is on your roof now and is there a class action lawsuit effecting that shingle (there might be).  

Finally, I like tying up the reserves a bit longer to earn more interest.  For example, use CD ladders for 12 months of personal income (save up a year of income) - 12, one-year CD's with one month of income one CD renews every months and rolls over into a new 12 month period. If I need the money, I just stop the auto renewal and pull the money out. If I need more money, more money is available next month.  This is easy to get started, just open a CD every month for a year - any amount you can afford will work - the next year when the CD renews, add some money to it. Eventually you have a year of income saved up. 

Same with the CapEx account - put that money into some other financial instrument to earn as much as possible while it's sitting there waiting to be used.