How Much Cash Reserves Do You Set Aside?

Question

Hi everyone,

What amount do you set aside towards your reserves fund for your properties? For example:

• X% of gross cash flow
• X months of operating expenses
• $X per square feet

For me, I was debating 6 months of operating expenses (mortgage, property taxes, all operating cost, etc), but I didn't have a "why" so was unsure how other investors planned for it. The reserves fund would be saved specifically for emergencies of vacancies, unexpected capital expenditures, etc.

Thank you!

Mike H. · Answer

To me I think the answer to that question is one of scale/range.

I think it depends on how many houses you have and what the average monthly profits for your rentals are.

Assuming you're netting 150/mo to 200/mo per house:

1) When you have 1 to 5 houses , i think 20k is a good number for reserves provided you have some credit card and/or repair store card credit as well (i.e. 10 to 20k in available credit there as well).

2) 6 to 10 houses I think 25 to 30k plus cc.

3) 11 to 20 I think 30k to 40k plus cc.

4) 20 to 30 50k to 60

5) 30 and above 75k

At some point, your profits almost become a reserve. At 40 houses, even if you have a "sky is falling" month and lose 3 furnaces (2k apiece)  and two roofs (7k apiece) totaling 20k , you should be allocating around 150/mo per house for repairs min plus making 7 to 8k in net profit.  That equates to 6k for repairs and 7k or 8k of profit. Even if that worst case scenario, you're really only dipping into reserves 5 to 7k......

The key is having cash and credit.

The more important reason why you need to have a good chunk of cash for reserves is more about qualifying for loans than it is about doomsday scenarios hitting with a bunch of repairs.

Typically most things can be pushed out too. So lets say you end up with 3 leaking roofs in one month. You can always tarp 1 of them and do two this month and one next month to help spread the costs.  Unfortunately, furnaces can't be pushed out like that though. But furnaces are far cheaper than roofs too (i.e. 2k or less for new furnace versus 5k to 8k for a new roof).

There are some other big ticket items that pop up now and then too. Sewer line issues. Water line (main). Both of those can be a sizable chunk too.

But I think the above reserves are reasonable in terms of will you have enough cash and credit to fix everything in a worst case scenario. The one thing you absolutely can't afford to do is not fix that stuff. When you do that, you get no rent. And thats when things can spiral out of control.

Nathan Gesner · Answer

For my market, I calculate three months vacancy and one major capex per unit. I consider the age and condition of the property, strength of the market, my personal financial strength, and other factors. Once I calculate the "worst-case" scenario for that property, I set aside that amount for the reserve.

I have more than one property but I run them all through the same accounts. I have a checking account for receiving rents and paying bills. I have a savings account where I maintain the reserve.

I do not fully fund a reserve for each property because I have a strong income and can absorb vacancies or a $5,000 furnace without digging into the reserve. If you live on a tighter budget, you may want to fully fund your reserve for each property.

As I add units, I reduce the amount entered into the reserve. It doesn't make sense to have $70,000 in the bank for ten single-family homes. The odds are very low that they would all go vacant or need major repairs at the same time. I also don't want money sitting in an account unused.

Todd Dexheimer · Answer

We start with 8 months of mortgage payments day #1. Then we are always adding about 4% of the gross income per month for additional reserves.

Patrick Liska · Answer

I set aside enough for any major repairs. your biggest repair will be your roof, you have enough on hand to repair that, you have enough to cover any other issue, just make sure to replenish it if you use it. my number is usually around 10K, that said i just bought a house and had to replace the roof - 15K later. Now i do not expect to have to do any repairs to that roof for hopefully at least 25 years, but if i make money, it will go into the account until i hit that amount at least and will not take a cent from the income except for expenses. once i hit the number for each property, then that is profit and i can draw the money, but i sleep better knowing that money is there ready when i need it, and i also do not cross money between properties.

Johnny Hastings · Answer

I never really had a formula for this. I took a bit of a guess, and went with it. For my first building (12 unit), I figured out the cost of a new boiler and water heater. It was about $13K. Since that's the only real mechanical components in the building, there's a newer steel roof on the place, and there isn't anything else major that could go wrong; I set aside $15K for it.

As I bought other properties, I did something similar. I later bought a 2 unit that's in really good shape, and a 3 unit that is in decent shape, but is over 100 years old. I figured furnaces, roof conditions, water heater conditions, and so on. In the end I just decided to set aside $5K per building. So now I have 3 building, and a total of $25K.

If some kind of worse case scenario struck two properties, I'd be covered. If it struck all three, I may be OK, but I may not. In that case though, I could leverage a few grand easily; so it doesn't seem sensible to tie up much more than the $25K.

I know a few other investors who don't maintain anything near this amount. To me it seems rather unsafe, but everyone has their own way of doing things I guess.

How Much Cash Reserves Do You Set Aside?

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