How to calculate reserves

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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. Imagine if you had one single-family home. The tenant fails to pay their last month's rent and leaves the place needing new flooring and paint. It will take two months to turn it around and get it rented. That's three months of mortgage and utilities, the cost of flooring, and the cost of painting. That's a pretty common scenario and could cost you $10,000 - $15,000 so that would be a good starting point for your reserve.But there's more! What if you're a cardiologist with no debt and making $250,000 a year? You could probably afford $20,000 without much impact on your personal budget. If you're a single mom with student loans, a car payment, and living paycheck-to-paycheck, then $20,000 would be devastating and a reserve is critical. 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 33 units, no debt except for mortgages, and excellent income. I can pay for all my problems using the cashflow from my current rentals. I also have a $175,000 line of credit at the ready if something catastrophic happened. A reserve is unnecessary, but I still keep around $15,000 - $20,000 in my account. The point is, you should sit down and assess your personal finances to determine what the worst-case scenario may look like, how much you would need to cover it without impacting your life, and whether you will need to build a reserve.

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Save 5-10% for CapEx. That'll be good :)

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All the revenue and expenses from my rentals flow into/out of a bank account completely separate from my personal finances. When I analyze a deal, I assume 35% is going out for PM, capex, vacancy, and maintenance (we self manage, but I like to pretend we don't so that expense doesn't affect our business when we do need to outsource management). But I don't separate the profit from reserves. It all just sits because my cashflow is going into the next deal anyways.That being said, if I was going to pull the cash flow, I would deduct that $220 as repair reserves whether I used it or not because while January might only cost $100 in repairs, February might be $320. If I took $120 from January and said "this is profit since I didn't use it," I've now put myself in the red because repairs are never going to be exactly 5% or less every month.If you're talking about taxes, that's a totally different story. An expense isn't an expense until the money is spent regardless of what you reserve.

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Hi Jessica,I am relatively inexperienced (own two properties) but pretty well read, so take this as you will. One way to consider it, is how would you put them on your taxes at the end of the year? Based on that categorize it accordingly. For maintenance, you could identify the average expenditure of maintenance on your property type by year and forecast that out for five years. Add a base amount for painting and cleaning every time a tenant leaves. For CAPEX, that entirely depends on what your longterm goals are for the property and when you want to achieve them. You could identify them, do some research on an estimate, and set a goal for how long you want to save for. For standard items, if you really want to get detailed, you can break down each property's major items (roof, floors, water heater, etc.) and forecast the total cost of replacing those on each property. That total would be what you maintain for CAPEX. Vacancy, again depends on you; it could just be 8% (or whatever your areas average is) for the year. There is also the need for having your six months PITI on hand for each property if you are able to purchase with another conventional or portfolio loan. What ever your numbers, I've seen most recommendations that all of your pure cash flow (including your vacancy, CAPEX, paint savings) should go to your cash reserves until you've reach that number. So how you categorize it in savings is less important than keeping tracking of it for tex write off and ensuring you have your total cash reserve number identified, and aggressively saving until that is what you have on hand. Brandon also noted that as you increase your properties, the diversification can offset your risk. So you can have a smaller cash reserve per property to allow for expansion, if that is your goal. Hope this was helpful and good luck!