Reserves: how much is good to save up?(General fund or per door?)

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Reserves: how much is good to save up?(General fund or per door?)

Kuriakos Mellos
Member since 2020 · 132 posts · 90 votes

Hi all!

I will be nearing the one year mark since I began this crazy journey on 9/4 - when my first tenant moved into my parents house that I converted into a rental.

Since then I’ve grown to five doors - three of them SFHs and two condos.

My journey of on boarding has been as follows :

SFH - September 2020

Condo - December 2020

My old condo in the city - made that a rental - Feb 2021

SFH (first out of state investment) - April 2021

SFH (second out of state investment ) June 2021

It’s been an aggressive build, and have been building reserves during the process - as well as began a very small general portfolio fund. (Most of these properties cash flow so I’ve been diving into them when need be a little bit for ‘pleasure’ and to treat myself - but still have been throwing most back into reserves of future purchases.

Reserves currently look like this:

SFH - September 2020. - $1700 (will be completely depleted September because I have a turnover with a new tenant and my prop Mgmt fees take the first months rent - luckily that covers all my costs so nothing out of pocket )

Condo - December 2020 - 1550 (costs are about 660 a month)

My old condo in the city - made that a rental - Feb 2021 -

1800 - costs are 1400 (have had some minor repairs in the last year so have gone into reserves a few times but keep replenishing)

SFH (first out of state investment) - April 2021 - $600

SFH (second out of state investment ) June 2021 - $125

My general fund is only a few hundred -

I have a tenant that is late in their rent (first time this has happened) and it made me pause to think - do I slow down on scaling and build up reserves first to build a cushion? Do you take some of your day job money to build the cushion for the general fund? What is a ‘safe’ amount to have per property?

Again things happened sort of fast so taking a little pause to think what is logical to do next -

Really appreciate you all!

K-Man

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Jody Sperling
Omaha, NE · Member since 2020 · 611 posts · 665 votes
5y

If you have 30% or so equity in your primary property, go out and find a bank—usually a local bank or credit union—that will offer a first position HELOC. This will cost you no more than $1,200; it functions like a refinance but closing costs are super cheap. Once you have the HELOC, move all of your "emergency funds" into it. The money is still available, but now it's parked in the HELOC, pushing the payment on your primary property lower, instantly improving your cash flow situation. People who use this strategy can "pay off" a house in 5 to 7 years in most cases (but of course you'll use the stored equity to acquire more doors, so the HELOC won't ever functionally get paid off).

Move all of your rent checks into the HELOC as well. The bank/credit union will give you access to 90% of the equity in the HELOC, so you'll already have a huge cash cushion compared to your previous situation.

Then, as you continue to build, you aim for 5k per property for a portfolio of fewer than ten properties, and 3k per property for a portfolio of greater than ten properties. Best of luck!

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  • Jody Sperling
    Omaha, NE · Member since 2020 · 611 posts · 665 votes
    5y

    If you have 30% or so equity in your primary property, go out and find a bank—usually a local bank or credit union—that will offer a first position HELOC. This will cost you no more than $1,200; it functions like a refinance but closing costs are super cheap. Once you have the HELOC, move all of your "emergency funds" into it. The money is still available, but now it's parked in the HELOC, pushing the payment on your primary property lower, instantly improving your cash flow situation. People who use this strategy can "pay off" a house in 5 to 7 years in most cases (but of course you'll use the stored equity to acquire more doors, so the HELOC won't ever functionally get paid off).

    Move all of your rent checks into the HELOC as well. The bank/credit union will give you access to 90% of the equity in the HELOC, so you'll already have a huge cash cushion compared to your previous situation.

    Then, as you continue to build, you aim for 5k per property for a portfolio of fewer than ten properties, and 3k per property for a portfolio of greater than ten properties. Best of luck!

    4Reply
  • Ryan Harwood
    Lender · NY · Member since 2020 · 13 posts · 7 votes
    5y

    @Jody Sperling

    I have not heard of this heloc strategy. Do you have any more info you can share or a link? Never heard of diverting checks into a heloc so I’m super curious

    2Reply
  • Lucian Guadagnoli
    CT · Member since 2021 · 10 posts · 4 votes
    5y
    Originally posted by @Jody Sperling:

    Once you have the HELOC, move all of your "emergency funds" into it. The money is still available, but now it's parked in the HELOC, pushing the payment on your primary property lower, instantly improving your cash flow situation.

    So when you say 'parking your funds in the HELOC', is that in the form of paying down the principal on the home the HELOC is against? And the improved cash flow comes from the reduced interest that comes from said principal paydown?

    If so, is your risk then prolonged draw from the HELOC (and dealing with that interest)?

    1Reply
  • Darius Ogloza
    Investor · Marin County California · Member since 2018 · 1k+ posts · 2k+ votes
    5y

    @Kuriakos Mellos You raise one of the most important questions that can be asked in the arena of rental house investing. The fact that the question needs to be posed in the first place (along with the fact that you are likely going to get dozens of different answers) underscores a key difference between rental house investing and, say, investing in a publicly traded REIT or a bond. IN rental house investing, furnaces and sewer main laterals fail and clog. Tenants stop paying or leave in the middle of the night. Roofs fail at the worst times. Local governments impose new mandates. Taxes increase. By being undercapitalized to deal with any of these potential issues, you risk losing your entire investment if you do not have sufficient cash or credit reserves to cover repairs, vacancies and cap ex.

    It appears you have about $3,500 in total cash reserves.   Yesterday, I had an unexpected sewer clog in a rental that had to be dug out at a cost of $3,500.  That one repair at one property would have wiped you out.  So, pretty clearly, you are already way under-reserved in terms of cash from my perspective.  At $10,000 I would still be sweating.  At $15,000 total cash, less so. At $20K, serenity (which Twain defined as a Christian gentleman holding four aces).   

    It is unclear from the OP how much credit you can also bring to bear in case of an emergency.  Some on here would frown on credit as a kind of reserve but to my mind it is better to borrow than to lose your investment (unless of course in retrospect your investment is itself a loser).   Access to credit is an important component of reserves.  

    1Reply
  • Allen L.
    Rental Property Investor · Chicago and mainly invests in KS remotely · Member since 2018 · 360 posts · 314 votes
    5y

    It should not scale linearly with the # of units because *generally haha* not all bad things happen at the same time. However, you should have a floor for the reserve per unit as you scale into a large portfolio, which may be $1200 or something in 2021 if you invest in the midwest. So if you own 50 SFHs, your reserve might be something like 60K. 

    0Reply
  • Jessie Kristie
    Member since 2021 · 59 posts · 35 votes
    5y

    @Jody Sperling Thanks for sharing! I've been reading about HELOC, home equity loans, and cash out refi but didn't know you can "park" your money in the HELOC. Will look more into this

    1Reply
  • Kuriakos Mellos
    OP
    Member since 2020 · 132 posts · 90 votes
    5y

    @Jody Sperling haven't really heard of that strategy before but will for sure dive  more into it. Thanks!

    0Reply
  • Kuriakos Mellos
    OP
    Member since 2020 · 132 posts · 90 votes
    5y

    @Darius Ogloza thanks for the feedback.  I plan on doing a quick build up of reserves from my current rents beginning in Septebmer - not keeping any of the profits from the cash flow (again have been dealing with minor repairs, appliance blow outs as well during the last few months and have not used my own savings for that.) I will be able to add about $1.8 K per month to reserves.  I also do have quite a bit of credit available to me that, gosh forbid, something happened I would easily be able to use that IF i needed.  Again I was in this aggressive building mode this last year, using my W2 job as a benefit, but am going to pause after my next purchase and just build up those reserves until 2022. Again one never knows what can happen.  

    1Reply
  • Jody Sperling
    Omaha, NE · Member since 2020 · 611 posts · 665 votes
    5y

    @Kuriakos Mellos and @Jessie Kristie and @Lucian Guadagnoli, sorry for the late reply. I was moving this weekend and hardly touched my phone or computer.

    The strategy I referred to has a few clever names, though clever names typically turn me away more than help me, so I avoid mentioning them, but the HELOC method is often called velocity banking. You can watch a video on Youtube by Wise Guys in Ties. If you type their name and Velocity Banking in the search, you'll find it. It's the most thorough well-explained primer on the subject, but it's also 90 or more minutes long, so some people's attention wavers.

    A few key components make this strategy much more effective, though you can even do the same process using a credit card.

    The components are as follows: (1) You want the HELOC in 1st Position (i.e. replaces the mortgage). (2) You have to park all your income into the HELOC. On months where there are no unforseen expenses, that will result in a lower line of credit and the power of daily interest shielding is why you park the money in the HELOC. (3) You have to treat the HELOC as your emergency savings. Don't max out the line of credit to buy a new property. Keep reserve equity available.

    Are there risks? In my opinion, the risks are fewer because, for example, if an emergency wipes you out one month, you can use the HELOC equity to pay the monthly payment on the HELOC. You'd want to never do that unless it's an emergency, but it's something you can't do with a Loan. Once you pay the loan, the money is trapped (or you have to pay out the other side to refinance). Not so with the HELOC.

    Lastly, is the risk of a HELOC being frozen by the bank really a big issue? Not when you consider that the worst outcome in that case is having a ton more equity in the property that you could, if emergency called for it, sell or refinance to access the cash.

    I'm passionate about this subject, so if you have more questions, message me. I'll happy chat on the phone or exchange messages. Best of luck, all!

    2Reply
  • Deanna Lawrence
    Investor · Dorsey, IL · Member since 2020 · 30 posts · 29 votes
    5y

    Being an ever increasingly conservative (financially) investor, I feel compelled to point out that banks usually have the right to call your HELOC at any time, in which case they would keep all of your "reserves" that are sitting there. This may be a remote possibility, but it still exists. And it usually happens when you can least afford it.

    I personally would have 3-6 months worth of expenses sitting in each property's account for primary reserves and a backup account that holds say 30% of that total as secondary reserves that can be used on any property. For example 5 properties x $500/mo x 6 months = $15,000 primary reserves and $4,500 as backup reserves.

    Just my two cents....

    3Reply
  • Kuriakos Mellos
    OP
    Member since 2020 · 132 posts · 90 votes
    5y

    @Deanna Lawrence thanks :-)

    0Reply
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