When to Take Out Cashflow??

Question

I have a SFR being managed by a property manager. It is currently rented out. I have about $5,000 in the property management account for "cash reserves". Six months PITI (principal, interest, taxes, and insurance) is about $3,300.

When I do the analysis the property cashflows about $100 per month after factoring in vacancy, maintenance, etc. However, I have no clue how "vacant" the property will be over time, or when an AC unit will crater. Maybe I am over-analyzing things, but I can't seem to convince myself at what balance in the property management account I will feel comfortable taking out the cashflow to invest in other properties. What are some thoughts on this? Am I good to go ahead and take out the cashflow now and adjust later if my analysis predictions were incorrect?

Kevin Brown · Answer

Probably so. It's the area, not the house. I'll probably unload it next year if they don't renew. I had offers on it for $13k above what I paid for it, but after closing costs it would have only been about $4k and I wanted to the experience. That's why I threw the $5,000 cash reserves in there. Just in case.

Amy E. · Answer

For context purposes, I own 5 SFRs, which I bought over the past two years. I started with enough to "turn" a house over and get new tenants, plus 3 months of business expenses (taxes, insurance, debt payments, etc.) in cash or at least easily accessible. As time goes on, I added 15% of the rents to the fund for maintenance expenses, which builds up quickly. So when a house is vacant and I have to "turn" it, or when the roof gets a hole in it, I have enough cash to cover me. You may want to adjust upwards if it takes you more than about a month to rent the home since you are 100% vacant when you are vacant at all. But I would do a little research and figure out what it costs to turn a property over (paint, flooring, cleaning, etc.) and go from there.I think most folks would say that's way too conservative, but I am fairly risk adverse. My houses are cheap and small, and the rent comparably high. So 15% of rent is enough to cover maintenance, although I only have two years of data points.

Kevin Brown · Answer

Yeah I need to clarify. She didn't ask me to put $5,000 in the PM account, I just did to have some reserves and for $2,800 to replace the furnace in a few months.So, let me break down how this works.The PM account is in her name, but per the agreement the cash is my asset. The rent flows into that account, she pays herself 10% of the rent for PM fee, and then if there are any maintenance/repairs to be made. She always lets me know up front before something needs to be done and gets my approval. She also charges 100% of one month's rent as a listing and signing fee. This is taken out of the tenant security deposit (one month's rent), which means I will need to save 1/12th of that security deposit each month to pay the tenant back upon vacating. Also, my mortgage is a private loan and insurance and taxes are not escrowed. So, I have to save for those each month as those are actual planned expenses.I have my property in an LLC in which I plan to add more properties to in the future. I have the PM account for property administration, and then a business checking account that I planned on moving the profits to each month to save for a future purchase. I don't need or want any of the cashflow for personal use. It is strictly for growing the business. However, I don't want to keep it in the PM account, I want to keep it in the business checking account just to keep it separate. I'm very compartmentalized in my thinking, maybe a little OCD about it.So, if I am "saving" each month for vacancy, maintenance, cap ex, etc. at what point do I have enough money "saved" for those items? Twelves month's worth? Six month's worth? If I have $5,000 for "reserves" can I then move any cash over that amount to a "savings" account for growth? Or, since I originally figured $100 cashflow do I just take out $100 each month for savings and keep letting the reserves build?Again, maybe I am waaaaay over complicating this.

Brandon Ingegneri · Answer

You need a property manager who doesn't hold what essentially seems like a retainer. They should be in contact keeping you in the loop as to potential work and upcoming expenses. Billing you monthly for these expenses seems more realistic than having what is basically a draw down account. When do you pull money out? Well that depends on your overall game plan. Do you want to grow? Are you going to be using commercial loans, residential loans? Do you want to expand or just put a few bucks in your pocket each month? The answers to those questions will certainly have an impact on what you should be doing. As a general statement, your never going to lose having 6 months of all of your bills banked. I break down all of my monthly and yearly expenses. I also include potential expenses. I then break everything down into a monthly dollar amount and add them up, and then round up. Just a random example, if I need to budget let's say 600 for everything, I'll save $750. If it's $1000, I'll save 1250, and so on. I over estimate a little to a pretty round denomination. From that saved money monthly, I allocate: mtg ins taxes cap ex savings business profit, etc. after all of those are satisfied, I'll take the remainder to a rounded amount. This time, I round down. If there is $650 left over, I'll take $500 and so on. This way, your always accumulating and covering expenses. You won't need to worry about bills and your reserves will continue to increase, and you have a little cash flow in your pocket each month.

Kevin Brown · Answer

Ok, so let me try to summarize the advice here.1. Keep the reserves in my own account and not the PM.2. Build up to $10k per unit (or whatever makes me feel comfortable)3. THEN I can take out the excess cashflow and apply it toward future properties.If I don't have this correct please advise. Thanks again for the replies.

Russell Gronsky · Answer

Agreed on keeping the money in your account, not the PM's. Also, $10K per house is what you should keep in reserves.....that's the number that was recommended to me by guys with a net worth a lot bigger than mine and it has served me well. Once, because the roof leaked on one of my properties. That was $14,000 with a lot of negotiations. Another time, heavy rains caused a minor flood in a property. Not only did I have to repair and replace carpet as well as tenant's belongings, I also had to fix the incorrect slope issue in the back yard I found to be the root cause of the flood.

Tim Davis · Answer

@Kevin Brown...I do this everyday and I very rarely have more than $500 per property in any owners account. If there is a major repair that needs to be done we ask the owner to make a contribution. If I were you I would keep my cash reserves in my bank account. There is no need to have it with your PM. He can ask for it if he needs it. That is my 2 cents.

Kevin Brown · Answer

First of all the manager requires a certain level of cash reserves. Second of all it's in a LLC and for accounting purposes I had to have a separate account anyway. However, I am starting to see what you guys are saying about the manager knowing I have money to spend. The amount over 6 months PITI (about $2,000) was also because I need to replace the furnace before next winter.

Frank Jiang · Answer

Not totally on topic, but why keep it in the property management account? You're basically letting them know you have cash for "unexpected repairs." You should absolutely have reserves, you can't take all of it out and invest everything with no liquid capital, but you should keep cash reserves in a separate bank account.

Atwan Kwan · Answer

ouch, it might be tough getting rent back up unless they move out?