Cash Reserves for your rental? How much!

[Eric Dami]

Hey BP!

I know when analyzing deals, its critical to account for vacancy %, repairs %, CapEx to cover costs. Is there a rough estimate that anyone is aiming for?

For example, if I did a remodel on a home and replaced electric, plumbing, Hvac and cosmetic, I would look to have ~5k in cash reserves. Whereas, if I did not replace big ticket items and just did some minor cosmetic work, I would estimate around ~10k in cash reserves. 

To be more specific, assume you're self-managing, the property is within ~1hour of where you reside. Does anyone have some thoughts, or am I missing anything. I am not looking for exacts as every property is different. I am looking for an estimation. 

[Nathan Gesner]

@Eric Dami 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 major expense and three months of vacancy. If a unit rents for $1,000 a month and a new roof would cost $8,000 then I would save up a reserve of around $11,000.

If you are a cardiologist with almost no debt and making $250,000 a year then maybe you don't even need a reserve. When bad things happen, maybe you're able to spend $20,000 without much impact on your personal budget. But if you are living paycheck to paycheck, carrying debt, or your job is questionable, then I would definitely insist you save up a reserve fund.

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 20 units and my reserve is only $20,000. I plan to get rid of that reserve soon and replace it with a line of credit. However, I also don't carry debt except for my personal home and investments, I don't live paycheck-to-paycheck, and my properties are cash-flowing well enough that I could divert all income to handle the problem.

The point is, you have to sit down and assess your position personally and with your investments and determine what kind of safety net you need.