No reserves necessary

[Arlan Potter]

I have seen a bunch of questions about reserves for things like vacancies, major repairs, and capital improvements. In my opinion, these are not relevant to my rental empire.

I try to find properties that at a minimum have rent, or should have rent of at least 1% but preferably closer to 2% of purchase price. If that is the case, the rental should have a decent cash flow.  I don't use cap improvements, or possible future vacancies, or roofs to make a buy decision. I want properties that have good rental rates, that are a good value. If you get enough properties, repairs, minor and major, will be taken care of with cash flow. 

The reserves are also not necessary for beginners. Here's why.

The new investor buys a rental and then what. 100% of the income should be used for debt service! repairs! and to get reedy to buy more properties! or for retirement. 100%.  In fact for me, until I owned close to 50 rentals, I did not spend much income at all. All kept paying down debt, making repairs, and buying more properties. Once my wife started working for the rental business, we started taking out money for her work. I still don't take out for what I do. I just keep buying properties.

Therefore if you are saving 100% then it is not called a reserve! but a reinvestment. 

Now in a retired persons case: if retired and a few rentals are owned to supplement retirement then some rent should be saved for major repairs, if no other saving exist. 

Now on the subject of vacancies. Vacancies are not expenses, they are just times when you are not collecting rent. These should be rare. And if you are continually buying, and paying down debt, an occasional vacancy is not a concern, but they may be a sign that your rents are too high. Now if you own property in an area where vacancies are a regular occurrence, then you may have rentals in a  poor rental area and may own a bad investment. Sell. 

Since most on this sight want an empire, quit worrying about reserves and get to buying properties.

Dallas Cowboys to the Super Bowl!  Dallas vs. Denver

[Jeff S.]

To be only slightly more blunt, this is among the worst business advice I've ever read on this board. I can't tell if you're serious or just bragging to show how great a businessperson you are. Lucky so far, in my view.

No serious business should be run without reserves. It's irresponsible. Plus, you seem to only focus on repairs. A lawsuit (even if you win), a large tax bill, a city assessment, or large insurance bill without the means to pay, can take your entire empire down.

Worse yet, with 50 properties, I imagine some of your loans are portfolio or at least individual commercial. Have you read your deed of trusts or mortgages? They will almost always require reserves. Don't know if you'll ever get caught or not, but you are likely in default on your loans. A default of one can mean a default on all and a demand for immediate payoff of all your properties by an astute lender. You might run your business as a cowboy, but it doesn't mean a lender will want to participate in such nonsense.

On the other hand, please don't tell me you obtain owner financing and put unknowing home sellers in such a precarious position. How selfish.

This is very shortsighted management and not a terribly well thought out idea. Most businesses would consider it a problem to be fixed, so it's actually hard for me to believe anyone would actually brag about or be proud of this.