How much in cash reserves

[Manny Rivero]

hey everyone, i listened to podcast episode 172 about apartment complex investing not too long ago. On the episode the guy being interviewed said banks typically require you to keep a certain amount of cash reserves in a separate account with them. He said it was typically between 250-300 per unit. Im trying to figure out what he was talking about. $300 per unit for a 50 unit complex doesn't seem like that much. Maybe someone could help me out. Thanks!

[Andrew Cushman]

@Manny Rivero, both @Abel Sng and @Michael Le make accurate points. Some, but not all, banks will require you to set aside replacement reserves of $250-$300 per unit per year.  Fannie and Freddie in particular do this by calculating the total per year, breaking it into 12 equal amounts, and then including it in your monthly payment.  When you spend money on a qualifying cap ex item, you submit to the servicer for reimbursement of the impounded funds.

To address Michael's point, this is a bare minimum and generally not sufficient.  It will really only cover recurring stuff like carpet, appliances, etc.  When you purchase a property the best thing to do is complete a replacement schedule for your hold period.  So, if you're going to hold for ten years, you figure out what you will likely have to replace over that period and how much it will cost - roofs, AC units, new paint job, parking lot, etc.  You then bring in that amount for cap ex reserves when you purchase the deal.

A slightly more risky but very doable method is to reposition the property, increase value, and then do a cash out refi so that you can set aside a large chunk of cash for reserves.  Of course, if the refi doesn't work out you could be in trouble.

Do NOT plan on covering big items from cash flow.  It almost never works.  One of the biggest reasons I see multifamily owners fail is they didn't properly capitalize the property from the start.  Once money gets tight and repairs start having to be put off, the property often enters into a death spiral as lower quality tenants apply, revenue goes down further, more repairs can't be made, etc.  Not a good position to be in!

Good luck!

Andrew