Why you need reserves

[Josh Young]

I see a lot of people analyzing deals and they do a nice job of assigning a certain percentage of monthly rent for different expenses, maybe 5% repairs/maintenance, 5% Cap Ex, 4% Vacancy, and 8-10% Property Management. I think this is a great way to underwrite a deal, but in reality these expenses don't happen all nice and spread out like the budget; they can and do happen thousands of dollars at a time, sometimes tens of thousands. In the past 3 months I replaced the HVAC in two of my rental SFH, one was $9k and the other was a little bigger, so it was $10k, this wasn't a big deal because I had the reserves. My point is, for anyone starting out wanting to live on the cash flow from rental properties, do yourself a favor and add a little extra to your reserves, it will help you make better decisions. Lenders usually require 6 months of PITI payments as reserves, but I like to have a little more, I like to have 6 months plus $10k per property for SFH. How much do you like to keep in reserves?