Cash Reserves

[Shawn H.]

The 50% rule applies to multiple properties over an extended period of time. When starting out, with only a couple properties, is there a certain amount, per unit, suggested to keep in reserves? Also, when considering new purchases, would you build up reserves to account for the new purchase? Ex. if you have 3 units and like to have $2000/unit, would you wait until you have $8000 before purchasing the fourth. Almost seems more risky until you have substantial monthly cash flow from many properties.

[Jon Holdman]

I think having sufficient reserves to weather a downturn is more important than adding to your business. If a furnace fails in the middle of winter, you MUST have cash or credit to get that working ASAP. Expected lifetimes are useful for long term planning, but failures or sudden tenant moveouts can happen at any time. If you can't cope with that, your rental business will crater when (not if) this happens.

The difference between having a few rentals and a lot is the cash flow. If you have two rentals that generate $200 in phony cash flow (the cash left after your PITI payment, what you pay yourself for PM, your profit and anything else you have to pay each month), then you can accumulate $400 a month from these two properties when things are going OK. If you have a $3000 expense you can recover that $3000 in eight months. If you have 20 similar properties, you'll be generating $4000 a month and you can recover from a $3000 expense in under a month. So, you don't need to have $2000 or some such per property. You just need enough working capital to cover the irregular but totally expected big expenses. $10K is probably enough whether you have two SFRs or 20.

If you have apartment buildings, you may need more working capital because you can have larger expenses. A new boiler or roof on an apartment building can set you back $10K all at once. So, maybe you need $20K.