How Much Liquid Cash Should I Keep Available?

Question

Hi All,I have a quick question I'd appreciate your input on, especially if you already own numerous multi-family properties yourself. I currently have two rentals with good cash flow, one a single family and one a duplex I'll be moving into in the near future. My goal is within 3-5 years to own 3 or 4 triplexes or quads with about 20%-30% equity in each (don't want to over leverage). My question is, assuming each property is in good overall condition and solid, no major capex expenses are on the horizon like a new roof for instance, how much should I be keeping in liquid cash for large unexpected repairs to these properties? Also assume these properties are worth about $180,000 each. I know there are many variables, and maybe no single correct answer, but I'm just looking for a rough ballpark figure here. Is $20,000 a good number? Too high, too low? Thanks in advance for any input you can give.

Jeff Kehl · Answer

@Andrew MeyerBoth methods work out to about exactly the same for me. As an example, let's say you own 10 single family homes worth $100k each. Total portfolio is $1 million so 4 % says you should keep $40k liquid. If you had them 75% financed at 5% for 30 years your mortgage payment would be about $4k per month. Add in $2k a month to cover taxes and insurance and your total monthly is about $6k. To cover that for 6 months you need $36k. So both numbers are about the same but I would be conservative and take the higher one. These are really just rules of thumb and how much you set aside is really up to your risk profile and specifics of your portfolio. For instance, if the same example portfolio were not leveraged at all you could probably get away with very little as cash reserves because you could cover the taxes and insurance and any capital expenses out of the cash flow. But I would still probably keep $10k in reserve just to make myself sleep better.The 6 month rule I like because that tells me I could last 6 months with 100% vacancy. I think it's also a good idea to think about what the worst case scenario or scenarios would be and plan for those. Like what would happen if you were 50% vacant over 6 months and had to replace 3 roofs, 3 hvacs and completely rehab 3 units for $50k total. Could you last through that? I've never had more than 15% vacancy and it's usually in the 2-10% range even during the worst of the recession but you never know what could happen.During the last 5 years I've bought a lot of properties where the owners didn't spend cap ex, fell behind on taxes and eventually got foreclosed on. I want to stay focused on that not being me next time the economy has trouble.

Jeff Kehl · Answer

I use two different rules for cash reserves. 6 months x monthly debt service, insurance and taxes = x4% x gross value of real estate portfolio = yx and y for me work out to roughly the same amount. I keep that amount in liquid or close to liquid funds.

Tim Porsche · Answer

Account ClosedThanks for the replies John and Jerry. I do normally factor in about 20% of rent right off the top for vacancy + repairs + capex, I guess my question was more at what point should I stop saving excess income for future repairs and capex costs, and start putting it into more properties or investments? Assuming that there are no expenses that I know are going to be coming due in the near future, such as an old roof or water heater.My goal is to reinvest as much of the income as I can as fast as I can instead of having it sit idle, but without putting myself in a position where I'm unprepared for a big repair\replacement or two.

Jeremy S. · Answer

I keep about 10-15k for my 9 units but I rehabbed them all myself so expect low cap ex. I also have access to helocs and I'm always getting offers for no interest for 18 month credit cards so I would absolutely consider dipping into my reserve fund if I was a few $k short on a great deal. I think it's about your personal comfort level and risk tolerance

John Thedford · Answer

A good rule of thumb is to put back about 7-8% for CapEx. You might not need it today but one day you will. That rule applies to MF or SFR. I put all rental income into a separate account and let it sit there. When taxes come due..no problem. If I need a roof or A/C no problem. Mortgage payment no problem.

Tim Porsche · Answer

@Jeff KehlThanks! That is exactly what I was looking for, just a general rule of thumb to go by.

Andrew Meyer · Answer

Just to clarify, you keep the higher between 6 months PITI or 4% gross RE value or do you keep them added together (X or y vs X+Y)?