How much cash do you keep on hand

Question

I’m a new investor and just this week, after about a year and a half of saving and learning, have just put my first property under contract (fingers crossed)! It’s no homerun but it will cash flow and has me thinking on to the next, and I have arrived at the following question:

How much cash do you keep in your emergency fund?

I tend to approach this with the standard personal finance rule: build a 6 month safety net. So, as I acquire more properties, from that perspective, I would keep enough cash on hand to cover 6 months worth of each mortgage.

For context, I live rent free in my rural market thanks to my job, so I set aside $500/mo from my W2 income for real estate investing. I’m this will be my first property, so I don’t have any equity to tap into. I have about $9k in available credit to tap into, but for obvious reasons, that’s a last resort.

So, as an example, the mortgage for this current property will be about $460. By budgeting in repairs, CapEx, vacancy, and property management (which I'll do myself for a while), plus pumping the cash flow back into it, I will fill my 6 month emergency fund in about 4 months (not counting my W2 savings). Obviously I would continue to set money aside for Repairs, etc, but that in reality even 6 months of mortgage could be wiped out pretty easily if the right thing went wrong. So at what point do you feel safe buying the next one or two? I'll be perpetually setting aside a percent of the rent for repairs, CapEx, etc, but at what minimum amount do you draw a line? 6 months per property? 12?

I’m not sure I’m articulating this well, but the basic question is: how do you balance safety net with wanting to expand? Expand too quickly, your emergency funds are not nearly large enough. Expand too slowly, and you have cash sitting idly. I’m not afraid of idle cash if I know I could cover virtually any emergency, but I also want to grow as quickly as makes sense. I know the answer varies from person to person and situation to situation, but I’d love to hear your approach and how you try to achieve that balance.

Anthony Wick · Answer

@Jacob PhillipsI’ll just tell you what I do, and it varies by age and type of investment. For starters, I don’t agree with most people in what a true emergency is. I look at it like a medical need. There’s emergencies, there’s urgent care, and there’s predicaments. There are very few emergencies ever in your personal finance life, unless you need bail money. Most everything else can be taken care of on credit until you free up your cash. I mean, when’s the last time you needed to head to the actual ER? So, I keep about $5k cash on hand for personal uses, $3-4K for my properties owned in my name only, and $10-15k cash on hand for properties owned in my LLC. All other monies I invest, with a large portion in Vanguard VTSAX. This money is a brokerage account that I can access and have cash on hand in about 48 hours. Should disaster strike and say, numerous HVAC’s, sewage, or roofs, etc need repairing today, the work can start while I access those excess reserves. In the meantime, those reserves had a return of 30% in 2019. Sure, there’s some risk, but I feel the upside is greater than the risk. And I really dislike my money sitting in the bank and losing 3% to inflation every year. As a matter of fact, I’m thinking about lowering the cash on hand, as most of my properties are sitting pretty solid for capex needs.

John Teachout · Answer

How much reserve you need depends a lot on your leverage situation. If someone is going to leverage multiple properties, I think a blend of highly leveraged and paid off properties is a better plan that having some leverage on all of them. Another factor is your access to bank funds if the need arose. ie, a HELOC, etc. I am risk averse but not opposed to loans for properties. We currently have all our properties paid off but as we acquire more will need to borrow money to expand. The paid off ones can fund the loans though.

Lynnette E. · Answer

I keep 6 months of expenses, plus the insurance deductible for everything (vehicles, rentals, personal property), plus the money for any major things I expect to replace in the next 5 years (e.g. roof, HVAC, windows) are in the CAPEX fund just incase they die earlier than I expect their life to last.

Kase Knochenhauer · Answer

@Jacob Phillips - I try to keep three months of expenses for ALL my expenses (business, all rentals, personal, etc) but aim transition to 6-months emergency fund over the next year (we just had a second baby).Given you have only one rental, I would be much more comfortable with 6 months expenses and at least 3 months personal expenses. Any vacancy you won't be an issue then.

John Teachout · Answer

In my experience the first few properties tend to be spaced quite far apart time wise and then as you acquire cash flowing assets and the confidence that comes with experience, the speed of acquiring additional properties increases.

Jacob Phillips · Answer

@John Teachout as Im just starting out, I’m anticipating very little access to bank funds. I will virtually no equity to tap into. My premise for this question is kind of in the realm of “Ok, my first one is underway. I’m seriously addicted to this process. At what point am I safe to go after the next one?” So that’s where I’m asking you guys kind of what sort of rules you hold yourself to during your acquisition phase. Obviously, this question changes once I’m done acquiring, but I’m far from that point. What amount or percent of available funds do you deem yourself “safe” to pursue the next one. If I save up 6 months of expenses plus big ticket items and then drain it on a down payment for the next one, we’ll i just shot myself in the foot. I’m talking about an untouchable emergency fund.

Jacob Phillips · Answer

@Lynnette E. This is probably closest to my original way of viewing it with a few twists. You gave me more to think about and some “ahhh duh,” so thank you for that :)

Josue Vargas · Answer

@Jacob PhillipsAt a minimum (beside from your security deposit), you should have cash on hand to replace one of the major mechanical equipment (often the AC/Heater units). Often than "predictable", these things do not tell you when they need replacement. For sure you can estimate remaining life and all that. I can tell you it id doesn't happen as predicted it can make your life miserable. It can run in the $2500 to $10K depending of the repair, unit, size, etc. etc. Other thing that may need quick attention is the roof, while you can do patches, a lot of retrofitting will cost you more in the long haul (+$7/sqft.). These are my two major things. Every property is unique, look for big ticket items near their end service life.

Jacob Phillips · Answer

@Kase Knochenhauer thank you for tour input! I plan to run them separately. So I have six months of personal finances all saved up (a prerequisite for moving on with my real estate pursuits). I thought I’d maintain a 6 month minimum cushion in the business before moving on to (and saving for) the next property. So one $500 mortgage requires $3000 in the bank, before saving for property two. Once I have it, a second $500 mortgage would require $6000 saved up before the next and so on. The troubling part is ultimately that’s just not that much money. Sure I have the available credit, but like I said, I’d hate to lean on that too hard.I’m just curious how other landlords address this topic.