How much are you keeping in reserves?

Question

I am sure that there is a spectrum of risk that we could all chart ourselves on and therefore I am not looking for right or wrong answers to this but am curious: How much are you keeping in reserves for each of your rentals? And, are you adding a certain amount per month per property to you reserve account for vacancy, repairs....?

Thanks,

Tony Legendre

Thanks,

Tony Legendre

Kyle Hipp · Answer

well I am on the low end compared to the other replies. I have 11 units. One property is a duplex in which I have a 50% partner on and one is my single family residence.

I usually purchase fixer upper type properties to build equity with remodels and proper upkeep. With this I get a good feel for what type of work needs to be done on a property. I keep very little in true reserves normally. I do however have a orderly plan for each property on what needs to be done and attack projects with value,  longevity, and efficiency in mind. I carry no consumer debt and still have my day job in which I can work essentially an unlimited amount of overtime to come up with quick cash. I have excellent access to credit currently. I do cashflow quite well each month because of the way I structure my holdings and how I handle my finances as a whole. I could be hurt with compounded large expenses but do see it as unlikely. I have an extremely low vacancy rate, about 20 days over 7 years. If a water heater or furnace goes out it is not something I would have to go into debt for as they are relatively inexpensive. I upgrade trouble areas and run a pretty lean operation by doing a lot of the work myself at this point. It has not bit me yet, Iwould say the worst was probable 3-4 years ago when I was not in as good of a position and a duplex had both aging furnaces need replacement at the same time. That was $5,000 and even though it was known that at some point it was not the time I wanted. We did it right though and that dramatically reduced our heating costs going forward. THis year I purchased a single family home for my family and have been very busy there with new driveway and teardown of falling apart 1 car garage to a new 2.5 car garage, stsrting 3 weeks after purchasing the home. Then took on a whole single family house rehabilitation which took 31 days straight to complete, did't sell for two months during which time I redid the siding on my house, new large back deck and quite a few small projects along the way. Then september first had a girl move out after I advised her that that would be her best choice and redid that in a week, new floors throughout, lots and lots and lots of cleaning, tub resurfacing and new tub surround, full paint job. Then slowed down and rented out the remodeled house. Looking back I could tell you how we did it but it always seems to work ;)

Account Closed · Answer

We have 10 units. We set aside the deposit into one account, another account for real estate and personal taxes and a third account for repairs/payments/utilities etc.  The reserve varies. This past year, we had 13,000 in roof replacement and 10,000 in heating/cooling replacements. We knew we had to put money into the properties and built up a reserve to pay for it.  You have always plan on a vacancy or two. On normal years we try to have $3,000/unit.

Tony Legendre · Answer

Thanks everyone. Good stuff!

Britt Abbey · Answer

Another option rather than keeping the money sitting in savings earning nothing is to have an equity line of credit large enough to cover major expenses.  Why let 6 months rent per unit sit idly earning a fraction of a percent if you could pay down debt with it until needed.  This assumes that you're in a decent equity position with one or multiple properties.

Tom Goans · Answer

@Tony Legendre,

It is the opinion of this longtime investor that the question you posed is best answered by you.

This is because every person is unique. Your present situation and goals are unique. Your family needs and future plans are unique. There is no magic number.

As for relying on what a financial institution may use as a rule of thumb, just remember the financial disasters they recently went through and the more than 1000 of them that are no longer in existence, include Merrill Lynch.

I also suggest reviewing your personal situation in great detail. This should take several days of contemplation. Then, be sure to plan for the What If's.

• What if there is a flood?
• What if the transmission goes out on the auto?
• What if there is a medical emergency?
• What if I get hurt and become incapacitated?
• What if Tony jr. wants to go to Harvard?
• What if the marriage becomes rocky?
• What if the federal government employees are furloughed and one lives in one of your properties?
• What if the government agencies finally realize they must reduce spending, including payroll?
• What if the best tenant in the whole world was laid off and needs your understanding and patience?

There are so many possible what if's that can unexpectedly pop up and greatly change your financial status and requirements. You can never account for all of them. Just be realistic and prepared.

One of my mentors once suggested to me to invest only half of the cash on hand and available credit.

Jason Miller · Answer

Never hurts to have a decent size reserve for future investments as well.  I believe banks require 3-6 months reserve per property past 4 when applying for new mortgages.

The more properties you have the easier it is to have a smaller reserve per property, but you never know what can happen.

Jerry W. · Answer

@Tony Legendre Great question.  I posted allmost the same thing about 1 year ago when I first started reading BP.  I have 2 different sets of rentals, one is a real estate company that I used to own with 3 partners, the other is 2 SFRs I own personally.  There are 12 SFR rentals and some small apartments in the company.  The company brings in about $4,000 more per month than mortgage and taxes per month.  I set aside $1,500 for my handyman, and the rest is put aside for repairs.  I usually spend it on repairs/upgrades.  If you watch your properties you can anticipate repars and be ready.  If I see a roof getting real bad I start putting aside monry to reroof it.  If a floor starts cracking and peeling I take the $2,500 and try to replace it.  The problem is that sometimes you get the $4,000 bill for digging up the sewer line you cannot get unblocked to find the plastic cap wedged in it and the $1,200 for new carpet in the apartment that had sewage spill all over it from the backed up sewer.  The $2,500 per month won't cover that.  I keep $5,000 set aside for these purposes.  I have found that you allmost never have 2 or more high dollar emergencys at once.  When I dip into the 5K I lower my upkeep outlays until my funds are back up.  I have personal savings, and credit cards if I get in a pinch but so far I have not had to dip into them but once.  If I have no big money items come up I buy a fridge when its on sale and store it until I need it, same with a hot water heater, or some windows on a closeout sale.  I try to upgrade things like carpet, windows, bathrooms, and appliances if money allows.  NEVER count on earnest money for repairs.  In my book that is stealing.  It is not your money, it belongs to someone else.  Put it in a seperate savings account so the temptation never arises.  Only take it out when a tenant moves out and you assess them damages and that money is used to then pay for the damages.  In some states/towns it is illegal to use the deposit money any other way.  For my 2 SFRs I own privately I keep $5k set aside for emergency repairs.  When I dip into that I get it back up as soon as possible.  Please note I have a good salary and can add cash if needed.  I do not take cash out for living expenses.  A lesson in why you need to buy good cash flowing properties.

Clay Manship · Answer

Hey @Tony Legendre -

Relatively new here as well. I will be keeping 6 months of mortgage payments plus 20% of gross rents a month aside. With these metrics, I am still looking at a 22% cash on cash, while remaining well-covered and safe. Would be interested to hear others' thoughts as well.

C

Tony Legendre · Answer

Nicholas,

Are you adding to you reserve fund monthly or do you just try to keep it at the 6 month mark?

Tony Legendre · Answer

Hi Marry.  Thanks for sharing.  I only have 2 rentals so far and am fairly new to investing myself, although I have helped several other investors the past few years working as a realtor.  I have always been very conservative financially.  Currently I have been putting 6 times the mortgage amount in reserves for each rental and adding $100/month/rental.

How much are you keeping in reserves?

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