How much reserve should you maintain?

Question

Do you keep a reserve? If so, how big is it? How did you decide on that number?

Scott Mac · Answer

I don't think there's a reliable way to come up with an exact dollar amount that everyone can just plug into their situation and be 100% safe.

Someone with one newer aged rental, who has a rather high income, such as a surgeon who lives alone comfortably with a lot of disposable income, could possibly carry less than a Mr and Mrs just starting out, with one rental that they bought as a turnkey in a more downtrodden neighborhood in a different state.

Also someone who is a hammer swinger type, who doesn't mind getting their hands dirty and putting in a hard day's work, might be able to get by with less than either of the above two.

The way I look at it, it is investment specific, based on what you think you will need in the next few years That could come from cash, or cash equivalents, or if you can afford to make the payments, it could come from borrowed funds. Or any combination of these.

Of course cash would be the best scenario and in my opinion if you have a large portfolio you really need to look at each of the assets to make that determination.

So the way I see it it's person's situation specific, as well as properties you have in your portfolio specific vs a specific amount.

Good Luck!

Chris Seveney · Answer

Yes we do, and I recommend everyone keep a reserve. Reserve is really tricky on calculating. Right now we sold most of our properties and are down to 2 single family rentals. So we keep $25k for the two (both are cash flowing and we have held for 10 years). The reason we keep that number is if we have a major repair we have the funds, or if we lose a tenant. That money is sitting in an account earning close to 5% so we are not complaining. We also have a line of credit as well that we could use. When we had more properties we would increase it, but it was not linear, but for me comfortable would be $20k for the first property and $5k increase for each additional door on top of that.

Nathan Gesner · Answer

@Chris Seveney and @Scott Mac thanks for sharing.

I agree that there's no hard number or specific formula. It depends on one's financial strength, the quality of the property, how many properties they own, and other factors.

I like to start with one significant expense and three months of vacancy. Imagine if you had one single-family home. The tenant fails to pay their last month's rent and leaves the place needing new flooring and paint. It will take two months to turn it around and get it rented. That's three months of mortgage and utilities, the cost of flooring, and the cost of painting. That's a typical scenario and could cost you $10,000 - $15,000 so that would be a good starting point for your reserve.

But there's more!

What if you're a cardiologist with no debt and making $250,000 annually? You could probably afford $20,000 without much impact on your budget. If you're a single mom with student loans, a car payment, and living paycheck-to-paycheck, then $20,000 would be devastating and a reserve is critical.

Colleen F. · Answer

To me a reserve is separate from your personal finances. So, it is what do you reserve for this property or this group of properties. Yes, higher income makes it easier to handle unexpected repairs but the property or group of properties itself should have a reserve.   I look at figuring what is the next big ticket item going to cost. I try to keep that in reserve.

Charles Perkins · Answer

Personally, I maintain both an emergency fund reserve and capital improvement/major repairs reserves.  The emergency fund is 6 months of living expenses approximately.  The Capex is a percentage set aside based on nearly 30 years of experience and my current property inspections.  I also maintain cash in CDs that could be utilized in case of extreme circumstances.

Samuel Diouf · Answer

At least 6 months of reserves after budgeting for capex.

Chris Seveney · Answer

I agree. Each situation is very different. Key is to make sure you are not cash poor.

What I am seeing right now in some sub2 FB groups and a few posts here on BP is people who got close to 100% financing on properties, have a tenant in them but need a major repair and have no funds for that repair.

These situations, especially when the seller in the sub2 still has their name on the property - are going to get real interesting.

John Litz · Answer

I have a little different perspective. To me it doesn’t matter if your new or if your experienced making a lot of money. Reserve funds should handle a major cap x like a roof, plus money to pay the bills while the work is being done as a tenant likely won’t be paying during this time. Each additional property you own would receive an additional percentage. You wouldn’t double reserves but you might add an additional 30% per property because the more you have the more likely 2 big events happen at the same time. Have credit cards available with zero balances to handle immediate needs paid back out of your actual reserve funds that are in a high yield savings account. Access is usually within a few days.

How much reserve should you maintain?

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