Best Way to Fund Reserves

[Jennifer Wood]

We have the opportunity to buy 12 single family units that are already rented through a portfolio with seller financing. We are still in the early stages of setting terms and we are out of state so haven't seen the properties (our agent has seen a few). They are in good condition but will need work as time goes on. We have the down payment and can make the mortgage payment to the seller. What we do need is funds in reserves for any capex expenses in at least the first year. What is the smartest way to find this? I'd rather not tap into my own homes equity as I want everything to run through our LLC. I am thinking we will need $100k in reserves but really don't know. My husband and I have W2 income and excellent credit and no debt except our mortgage. Would appreciate any advice/thoughts.

[Greg Kasmer]

Jennifer - My first question would be why you would need $100k in reserves for 12 properties? Typically a lender/bank would have some reserve requirement (3,6,9 months) that you would need to abide by, but in this scenario it's a seller financed sale, right? If that is the case, you can set your own expectations on reserves. If it were me, I would think about 3-6 months of principle and interest reserves plus reserves for repairs/maintenance. Typically I've seen about $500-$800 annually in repairs per house per year so that can be viewed as a benchmark. Lastly, if you don't need to live off the cashflow another way to solve this would be to save/stash the cashflow from the properties for the first 3-6 months in order to "build up" the reserves over time - this is, of course, assuming that there is cash flow from each property. Good Luck!