Reserves are almost an absolute necessity!

[Cal C.]

They would be an absolute except a few people get lucky and put everything they have into a rental property and nothing goes wrong for a year or two, giving them time to build up cash reserves.  Then again a few people win the lottery.   

However, most people are going to see vacancies, your PM turns out to be a major disappointment,  major unexpected repair work, a tenant who destroys a property and moves out in the middle of the night (especially when starting out), or sudden tax or insurance hike.  There is a  high probability something is going to go wrong within the first couple of years of owning a property, particularly when you don't know either how to inspect a property and/or you don't know how to properly screen tenants.

Remember, the majority of people out there can't come up with $2,000 within 30 days.  If you are one of those people  you need to think long and hard about becoming a landlord.  Yes you might get lucky, but then again you might get lucky in Vegas.  

I strongly believe that having reserves are extremely important to a buy and hold investor. Preferably, those reserves would be in a liquid bank account or other forms of liquid assets (stocks), then a CD, then a credit card with cash available on it, then pulling out of your IRA or borrowing it from someone you know who has the cash and is willing to lend you money when needed. That is a list I put together quickly and will likely tweak, but you get the idea. I'm certain there are other ways to raise some cash that you can count on as your reserves, but I very strongly believe you have to have some way available to quickly raise some cash.

I think investing in buy and hold property is an excellent idea, but it can easily be a terrible idea if you don't have reserves.  I certainly hope the investors in oil dependent parts of the country have some reserves, because I believe they are in for some tough times ahead.  

[Kimberly T.]

Originally posted by @Alex M.:

Great post and sage advise. For those of us, though, without the benefit of hindsight and experience in the industry, and without existing wealth or rental portfolios to build reserves to cover future unseen costs - can some of you please expound a little more on the following:

1. 1. how much is enough to get started? 
2. 2. what did you  do to build these reserves?
3. 3. for those out there who are getting by paycheck to paycheck, but wanting to get started, do you really recommend not just jumping in at the first opportunity, but instead waiting until you have a pot of "reserves" at whatever level you recommend (see answer to question 1.).

Thanks all.

Great post, Cal.

Alex, in answer to your questions:

1) It will never feel like enough, honestly.  However, I'd recommend at least five grand, preferably ten, as a reserve.  That should at least cover most of the possible surprises you might face.

2) My husband and I simply lived below our means.  Well below.  Pretty spartan, actually.  We still do, to be honest.  We are both engineers, so yes, we have good-paying jobs, but we also live in Orange County CA, which is quite expensive.  I set up a budget spreadsheet in Excel so we could see how much we could live on, then we stayed focused on being cheap.  We didn't have cable tv (still don't), I clipped coupons (still do), pretty much didn't spend money on anything unless we had to.  We also put off having kids, for 2 reasons: first, kids are expensive, and second, I plan to be a stay at home mom, and doing that wouldn't allow us to save up money.  That's how we saved up the down payment and reserves to buy our first rental, and it's how we've continued to buy rentals and grow our reserves.  We are now finally at the point where we're ready to start a family.

3) I really wouldn't go "all in" on a rental without some sort of reserves.  I don't have that kind of risk tolerance.  Some people do, and that's fine for them, but that's just not for me.