Why you need reserves

Question

Sharing an example of where reserves come handy.

A few weeks ago my rental property experienced a power surge that fried over half of the major appliances (HVAC, range, DW, etc) in every unit. Repair costs are ranging $1-2k per unit, and it’s taking several weeks to complete repairs.

While I expect the power company to cover most of the damage, having adequate reserves is allowing me to cover expenses until the claim process is completed - whenever that is.

I haven’t experienced an event like this in 15 yrs, but this goes to show that anything can happen.

Jay Hinrichs · Answer

this is a business this land lording and as a business one of the main things that any business needs is adequate reserves.. One issue I see is folks buying rentals with their IRA and tapping it out.. so when this stuff comes up they do not  have enough in the IRA to take care of unforeseen events.. so its doubly important if your buying rentals in the IRA to have a very nice amount of money left in the IRA in liquid investments.  under capitalized endeavors fail every day..

Matt M. · Answer

This is exactly why I love the posts about starting with no money... you truly need money to get into this game.

Nathan Gesner · Answer

@Allan C. I've had unexpected expenses within the first 3-6 months on every rental. My first rental ever cost me almost $10,000 in the first 3 months! If I didn't have fun day available, it could have broke me and soured my desire to invest.

Never spend your last dime to acquire property.

Steve Vaughan · Answer

Yes, definitely need reserves.

I'm on my 11th turnover in 5 months.  It's usually when less is coming in that we spend the most time and capital.

Also, since 3/7 of one building was vacant, we did capital improvements like parking lot resurfacing and new flooring and a current house vacancy needs the porch and steps rebuilt,  of course.

I've had multiple $20-30k outflow months. Have adequate reserves well above just acquisition funds 👍

Dennis M. · Answer

I can attest that you need atleast good credit lines or access to money if you don’t have a savings . You go in with pennies in your pocket ( don’t ask me how I know) and it makes for many sleepless nights worrying . Landlording is a funny business .

Everything can be running smooth as silk for months on end . Good tenants no big repairs everyone is paying you see cash flow building in your account ..This can lull your better judgment and think you got this sucker on cruise control ! Then Murphy hits and when he hits it’s usually not a “ bump in the road “ it’s more like hitting a moose on the interstate at 80 mph ! Everything seems to happen all at once in this business .

I don’t know why but it just always seems to pour when it rains in real estate . You gotta have money available in some form . This is why I can’t believe people write books on no money down and teach strategies on acquiring rentals with everything you got to get in . Your one sewer line away or major repairs from being bankrupt, is it really worth that to say you are a big shot investor only to fail and look like an idiot ?

Kyle Nelson · Answer

@Matt M.

Wholeheartedly agree. I would never suggest investing in real estate, or even owning a personal home, without a decent reserve fund. People that want to buy and flip homes and put stuff on credit cards scare me big time. I know, from experience, that every real estate transaction has fees and charges and general cost of doing business that always come out higher than estimated. Just closing costs can be sticker shock for some.

Jeff Willis · Answer

In every property I own, the very first thing I do is install a whole house surge protector at the service panel. This has saved me countless issues. Get a commercial one!

https://www.schneider-electric.us/en/work/products/explore/home-surge-protection/https://www.transtector.com/ac-surge-protector-spd-cfs-brick-120-a70-00-5006

Erik W. · Answer

Amen!  I put aside 5% of our gross potential rent (even if the unit is vacant!) each month into savings to account for emergencies and capital expenses.  Stuff wears out even when folks aren't living there.  The sun and the rain don't take a day off from clobbering the roof.

Allan C. · Answer

@Dennis M. Funny how it always seem to go from A-Ok to havoc in a blink of an eye. And your description of the feeling of complacency is spot on - the moment you feel comfortable is when you know something is coming around the corner.

Brent Paul · Answer

I had a ton of stuff break my first year.  Cartridge for shower broke and had no water, basement flooded, Clogged sewer pipe, Hood vent caught on fire, garage spring broke, Water softener went out and flooded the basement.  Now I am looking at replacing a leaky roof.  I like to have 10k for unknowns any time I buy a property and that's in addition to any repairs I make.

Always expect the unexpected.  You can't expect an inspector to find everything and often times they won't.  Things just break over time.

Why you need reserves

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