What Is A Good Amount To Have In Reserves?

Question

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.

Nathan Gesner · Answer

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.

Robin Thornton · Answer

Thanks @Cory M..  I wish you the best with your first property.   I really appreciate you @Nathan Gesner for being in these forums.  I am grateful for your valuable insight.   Thanks @Adam Bartomeo  and @Theresa Harris.  I am very familiar with the property and have already calculated what I need to save each month including for the Cap Ex items I will need in the next few years.  I have no children and no debt except my primary mortgage which is very low.  So, it sounds like I will be more than okay with about 10K to start @Emanuele Mayer and a nice line of credit.  This will allow me to put more money toward my 3rd property.  Thanks everyone!

Adam Bartomeo · Answer

Cap Ex Reserves has nothing to do with income! Sometimes I wonder... do the people that post answer on here really know what they are talking about?

You should be calculating Cap Ex for all long term items that will need replacement at some point - appliances, roofs, ac, water heater, etc. The two Cap Ex questions you should ask are:

- How much longer will they last?

- How much they will cost when they need to be changed?

For example, if a roof has 10 years of life left and will cost $20k in 10 years than you need to save:

$20k/120 months = $166.67 every month for the next 10 years. At year 19 you should have $18,000.36 is reserves, just for the roof.

Jonathan Greene · Answer

If you just want to throw out a general amount for safety, I would say 15k, but there is a lot of good advice above on how to judge it. The thing about reserves is that you can't predict when something will break so you could be way off if you do calculations on life span. It's a good hedge, but not an exact science.

Robin Thornton · Answer

Got it.  A general amount for safety is exactly what I was asking for.  $15K to start sounds good to me.  Thank you so much @Jonathan Greene.  I appreciate you being in these forums too.

Curtis Mears · Answer

I keep about 2x my max monthly expenses but this is probably more than necessary. Much of this would depend on your financial situation. If I was cash poor, then I would keep more in reserve since a large outlay could be catastrophic for the finances. If I was personally able to weather more, then I would not need as much in reserve. For 1 property, 5k should be a good starting point (depending on the area you live).

Jake Knight · Answer

We suggest having about 3-6 months of your monthly rent in a savings account in case you face uncertain times such as a long vacancy or expensive repair. Another great strategy is to open up a line of credit to help pay for any large repairs or capital improvements for no less than $25,000

Robin Thornton · Answer

Thanks @Twannisha Jackson.  I must have missed that episode.

Twannisha Jackson · Answer

hi, i heard on a bp podcast that 10% of whatever the purchase price is good. so $140,000 would be $14,000. I think that’s a good one, doesn’t hurt to throw more into it of course. i like it.

Gabe R. Gonzalez · Answer

@Robin Thornton Whatever calculation you decide, make sure to include your insurance deductible on top of whatever you budget for repairs or vacancy loss. You never know when you're going to need it.

What Is A Good Amount To Have In Reserves?

Most Popular Reply