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Updated 5 months ago on . Most recent reply
What Is A Good Amount To Have In Reserves?
Hello Again Good People of the BP Community.
I just rented out my 1st SFH rental property which I own free and clear. All major systems have been well maintained. Other than saving a certain amount from each rent payment (for taxes, insurance, PM, general repairs, maintenance, Cap X, and vacancy), does anyone have a rule of thumb for what a good amount of reserves would be for a SFH or any 1-4 unit property? I feel like I should transfer some personal funds to make sure this property is well covered before I purchase my next rental property. Any feedback would be greatly appreciated.
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This is not an exact science. It depends on your financial strength, the quality of the property, how many properties you own, etc.
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.
What if you have an apartment complex with 20 units? Do you save three months of vacancy for each unit and $50,000 for the roof replacement? That would be around $90,000 sitting in a savings account! At this point, I would recommend having a line of credit to cover these things so you don't have money sitting in the bank doing nothing when it could be put to work.
I have 33 units, no debt except for mortgages, and excellent income. I can pay for all my problems using the cash flow from my current rentals. I also have a $175,000 line of credit ready if something catastrophic happens. A reserve is unnecessary, but I still keep around $15,000 - $20,000 in my account.
The point is, that you should sit down and assess your finances to determine what the worst-case scenario may look like, how much you would need to cover it without impacting your life, and whether you will need to build a reserve.
- Nathan Gesner
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