At What Point Do You Have Enough Reserves Saved?

Question

Got to speak to an old acquaintance recently who I just found out is a real estate investor.  He has a small portfolio of 5 SFH properties in the Boise, ID area where I live with mortgages on all of them.  What surprised me is the amount he puts away for vacancies/capex/maintenance.  He said his rule is he puts either 2 years of rent or $25,000, whichever is larger, PER PROPERTY in an account to start with, (meaning he’s sitting on $125,000-plus just for reserves, I didn’t ask him the actual number he currently has saved), with 15% of his gross monthly rents going into this as well (if I understood him right, he just has 1 pooled savings account it all goes into).  He said he doesn’t purchase a property until he has the amount saved up and put away first.

I totally get that this is what helps him sleep comfortably at night, and glad it works for him.  This was just surprising to me, as it was such a significant divergence from the typical ’10% vacancy, 5% Capex, 5% maintenance’ type answer you usually see on the forums.  I hadn’t really thought about that there may be some people that only feel comfortable investing if they have substantial reserves set aside, first.

My questions to everybody are, at what point do you feel like you have enough set aside?  Do you set aside so much until you hit a certain amount, and then count the full cash flow as spendable money/monthly income, or do you just keep putting away those percentages in perpetuity?  At what point do you feel comfortable with the amount you have put away?

Malcomb Stapel · Answer

Something not mentioned is, your cashflow may determine your reserves. For instance, it would be more important to have higher reserves if your cashflows are leaner and you have less properties. However, with more properties and higher cashflows, you wouldn't necessarily have to scale your reserves on the same per door basis. The higher cashflow in itself, becomes something of a hedge against maintenance, vacancy and cap X. Please note, I am not saying don't have reserves.

Chris Davidson · Answer

@Jason Bohling Great question and such a tough one. While IMO it depends on your property count, property style, and quality. IF you just replaced some capx items it would seem pointless to have funds for those items on hand. Also for reserves I think it really depends on your financing. If you aren't very leveraged and have little debt you need much less. However if you are scaling and have more debt a higher reserve is needed. All of this looks solely at the properties and not any other income. IE if you have money coming from a W2 or other business streams. Also I think keeping funds for how you have performed on vacancy is important. I track portfolio vacancy on a dollar/day weighted basis, and isn't near 10%. This I think is important if you have a wide variety of properties as a vacancy of a 1/1 MF unit won't matter as much as a vacancy of a 4/2 SF.

All of that said I like to keep about 6 months on hand to cover debt, and have funds available for unforeseen capex items. While keeping an eye on Capex items that are coming up and have those funds built and ready as items come up.

While I am probably lighter on reserves than most it has allowed me to scale when necessary and prepare for major items as they come.

@Jason Bohling what reserve mix helps you sleep at night?

Sylvia B. · Answer

Our situation is a little different from most. We have no debt, so we don't have to worry about setting aside money to cover loan payments. Our property taxes are lower than many areas, so $8500 a year will cover that expense for 11 houses. Insurance is a little less than that, probably $7000. Every month I move $1500 into the reserve account to be sure those are covered. (Actually just a bookkeeping entry.)

Major systems are usually replaced before we rent out a house, so we rarely have big repair bills. We always have at least $20k in reserve, so we can cover anything that does come up. We expect to be out of the landlord business in 10-15 years, but you never know.

If for some weird reason all of our houses were vacant for a year, we'd be fine.

Jason Bohling · Answer

@Scott Mac thanks, you make some great points.  It’s been great getting everyone’s perspectives on this; you and everyone else who’ve responded have given me some good points to ponder, which I’m grateful for.  Given what he’s told me of his investing journey, I can understand his reasoning for having such a conservative stance on his reserves, and really, whether I think it’s a bit much or not, he’s investing, making progress and making it work for him so he’s clearly doing something right, and if we ever face a bad situation like the Great Recession again I have no doubts he’ll weather the storm this time and make it through okay.

Matthew Irish-Jones · Answer

@Jason Bohling two years of rent is ridiculous if you ask me.

I don’t have an amount but I have plenty of cash and a six figure HELOC sitting around doing nothing.

If one of my tenants stop paying and I have to evict them I bring in less revenue.  All my other tenants should continue to pay so it shouldn’t be that big of a deal.

For CapEx expenses you may get an occasional sewer line that goes but other than that you should have a Capital budget.  You should basically know annually what may be coming due, furnace, hot water tank, unit reno, etc..

Crap happens but, if you are sitting on to much cash you are not investing it.

Joshua Janus · Answer

My goal is to hold 6-9 months of PITI expenses per unit in reserves.

Jason Bohling · Answer

@Chris Davidson for me, 9 months of rents and 8% vacancy and 12% repairs/capex.  I fall in the camp of putting the 20% aside in perpetuity, as the money goes into savings which will not be keeping up with inflation and repairs can come out of nowhere.  I know that’s probably a bit more than some would do, but I like a good foundation as the more my bases are covered in life (not just real estate) the more comfortable I am with taking calculated risks.

Jasmine H. · Answer

@Jason Bohling we have 6 properties and a 4plex.  We put about 10% aside but only a portion of it is saved in cash. The rest is invested.

Malcomb Stapel · Answer

At the end of the day he is working a winning strategy. He may not scale as quickly and he may not be a mega-millionaire when it's done. But whichever way the market and the economy goes, he can sleep easy at night with his current system, and that has real value.

Ray Rivera · Answer

Great question!First things to consider are: 1. What you in theory should set aside & 2. What's your gut say? Some individuals can have what in theory should make them comfortable, yet, they aren't. Others, have major guts yet are taking high risk (IMO). Personally, 6-12 months of reserves will suffice. I always have additional reserves on hand for my properties (currently only 5 doors). My rentals are usually acquired in conditions where they needed large ticket items and so I calculate a lower CapEx since I already addressed major items (plumbing, electrical, roof, windows, hvac, sewer line, hot water tank, etc.). The rest is maintenance and I don't expect anything substantial- and in the odd reason it comes up, I have warranties plus reserves. As they say, best to have it and not need it then to need it and not have it.

At What Point Do You Have Enough Reserves Saved?

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