Reserves vs. spending/enjoying cashflow

[Brian R.]

I was hoping to poll those willing to share on your personal practices for keeping reserves as buy and hold investors. If you are willing to shed some light on your philosophy behind your practices that would be even more helpful.

I am working with the rough idea of [12xPITI + 1 month's rent + my insurance deductible] as a 'formula' for my reserve fund goals.

Something I am considering is taking my cashflow and splitting it in half. 50% for me to enjoy now and 50% for reserves and to build funds for future properties.

A little back story, I am investing in real estate to subsidize my own lifestyle, a freelancer/traveler. I want more property in the future for sure but also want to allow the fruits of my labor thus far to positively touch my life now [ie. spend some money].

Thoughts are appreciated and I am open to hear it all!

[David Faulkner]

Cash flow (and all profits for that matter) is to be recycled back into the business until it grows and compounds enough to cover all of your expenses with reasonable margin. "Enjoying" the cash flow before then is killing the goose that lays the golden egg. 

Maintaining adequate capital reserves at all times is important too ... anything above and beyond that gets reinvested. I compute a sort of "differred maintenance" figure by computing $/month for each item that will need to be replaced by taking total cost to replace divided by total lifetime ... add them all up and that is the $/mo minimum CapEx expense you need to put away into your reserves every month. Take all those items and multiply $/mo for that item and multiply by the approx age of the item ... add them all up and that is the minimum size of your CapEx reserve fund ... it is also a good idea to add several months carrying costs to cover vacancies as you have described above.