Appropriate Level of Reserves Calculation

[Jenny Bayless]

Hi everyone,

This is my first post on BiggerPockets!  I have been a big-time lurker on the site for many months now, and decided that I am ready to post my first question on the forums.  

This might be a very newbie-type question, but I was unable to find it elsewhere on the forums. I understand the importance of considering contingency-type costs when evaluating a buy and hold deal (vacancies, CapEx, maintenance, etc). My question is: what are some good ideas for actually executing and determining the appropriate funding levels for these reserve accounts?

For example, if you currently have a portfolio of 5 properties of varying ages, conditions, types (duplex v SFH), etc., are there any formulas out there that help determine that based on your particular portfolio you should have $X in a contingency account, and everything else is yours to keep and reinvest elsewhere, while reevaluating your contingency account as needed. Basically, is there a simplistic way to take the net condition of your entire portfolio to determine the best level of funding reserves to consider, or should you still fund amounts on a per property basis?

I would imagine it would be quite painstaking to individually parcel out each type of contingency on each property to put it aside in a separate account, and I would also imagine that there would be some sort of overall risk reduction with each additional property you buy, but I was not sure how to account for it.

I want to be sure to balance the appropriate amount of funding needed in case of issues/vacancies on the properties, but also didn't want to have idle cash sitting around not being put to work.

Thanks in advance!

Jenny