What percentage to keep in reserves when starting out

Question

Hello all! I am new to this forum but have learned a lot so far. It really has been like drinking from a firehose with all the info that is available on this website. I am new to real estate investing but I see the value in it and am planning on beginning my journey in 2020. I would like to start out in turnkey rental properties just to get my feet wet. I have been sitting on a pile of cash and want to begin buying rentals but I am not sure how much I should hold back to cover any unexpected costs that might arise. Any advice would be greatly appreciated!

Aaron K. · Answer

Not so much a percentage but enough to cover the worst thing that could happen, which is usually a roof, so I'd say about $10k-$15k minimum

Samuel Fletcher Hardy · Answer

We hold 3 months expenses plus the cost of a major repair it averages $10K mark.I am still relatively new to the game(but have a construction background) so this might be bad advice.But we close on a property then immediately open both a checking and savings account for the property then all repairs and mortgage payments come out of the checking account(eventually thats where rent is deposited) and the savings account is used for holding peoples deposits. This helps with accounting a TON! Once the property is rental ready we let the rents build that emergency fund over time before utilizing any income from the property for any other projects. While we use other incomes to start the next project.sorry for the data dump!

Bjorn Ahlblad · Answer

@Adam Cole it is not necessarily a percentage. I keep 40k on hand at all times just in case.

Brent Paul · Answer

How much you hold will depend on the condition of the property. Something that was completely gutted to the studs will need less maintenance than a 1960s rambler that hasn't been updated in 60 years.I bought my home 3 years ago. A 1980 ranch style home. In the first year I put almost 10k into the house for things that broke. There are just some things won't find until later. Inspection catches some, but not all of them. The age of the roof, siding, windows, ac, furnace, water heater, etc are something you should keep in mind. I keep 10k in reserves for each property. Granted I don't own many, but it helps. A Multifamily you will probably have higher expenses.

John Teachout · Answer

We have 8 properties rented and keep about $20k available for all of them combined. We have automatic transfers that go into a capex account every month. (xx amount per property) and if the account gets over $20k we will pull that out and use it elsewhere. If there's some big expenses, it builds back up until the bucket is full again. It's not likely you'll have problems with all your properties at once but don't make the foolish assumption that not more than one property at a time will have major problems. Lack of adequate reserves have sunk many an investor.

Kiera Underwood · Answer

@Adam Cole if it's been fully renovated like ripped to the studs and all major mechanicals are new, I'd factor in 5% of rent per month towards repairs. If a property is older and has not been fully flipped I'd factor closer to 10% of rent per month. These numbers are for OKC though.. so your market might drastically differ. Where are you looking to purchase? For capital expenditures, I keep 5k for each property for reserves. Typically you won't have more than one big item go at once. AC/Furnace or hot water tank won't cost more than 5k each!

Ralph R. · Answer

@Adam Cole. I keep enough cash around to cover one or two major expenses 10-20 k. The rest is credit. If all your houses have a problem at the same time you better re-evaluate your choice in houses. If it’s vacancy better look at your PM management skills. When you buy a new property you need a bigger cushion. It takes a bit for each house to settle in and produce income. Tenants move under new ownership because they are unsure of the new owner. There’s differed maintenance. You need payment reserves sign up reserves etc. some property managers ( the good ones) hold payment to the vendors until the house settles. My wife cleans for one like that. She might wait 2 months for payment. The new owner won’t get any rent until the vendors are paid. That means you gotta make the payments, taxes, insurance etc. we bought a triplex in rough shape. We didn’t get rent for 6 months or so. Hasn’t missed a beat since. Our money bought the place but tenant money fixed it up. I’ve had 3 vacancy’s at a time. Rents from other units covers the vacancy’s. You are managing a cash flow not a paycheck. They are different animals. After you get a few units the reserves can be less if your not needing the cash for a living. It’s downright foolish to put a set amount aside for each house and put it in a separate account for each house. Newbies do this or small mom and pop investors. That money sitting in the bank is capitol that could be used for purchase of other properties. Don’t fall into this trap. You need some funds available but just like every part of investing you have to manage it. As you get more properties you have other ways to get large amounts of money. Cash out re-fi’s, equity loans, lines of credit, I have 2 large credit cards that sit unused but I can buy materials with them if I need shingles, a heater, etc. then I can use a credit line, do a refinance or pay it off from reserves, sell a property, or??? Point is I have options, same as you should have an exit strategy. For the first 2-3 make sure you have lots of reserves then as you learn to manage your portfolio you will have a better idea how much money you need to keep around. I put a couple hundred per unit away each month. Then if I don’t use it I take it out. The bank accounts fluctuate from the first of the month to the end. Money coming in money going out. Then more rent at the first of the month and it starts all over. Just don’t take too much out as you start out. As it grows you will learn what amount you need to keep around to maintain your investments. RRy

Ralph R. · Answer

@Samuel Fletcher Hardy. What are you going to do when you have a large number of units?? How are you going to track 25-30bank accounts? Most book keepers get access to your bank accounts and track your books directly. Are you going to make them go through 20-30 bank accounts? When it comes time to pay yourself are you going to take a $100 draw out of 20-30 or more accounts? Seems like an accounting nightmare that will only serve to limit growth. RR

Adam Cole · Answer

Thanks Samuel. That makes sense to me. Better to be safe than sorry. I just didn’t want to be overly cautious and miss out. I appreciate all the responses!

Samuel Fletcher Hardy · Answer

I do it per house.lets say a house cashflows $1000, for easy numbers and we determine $10k in the bank is where we are confortable. The first 10 months of that unit performing all Cashflow goes to build that emergency fund. In the mean time I will move on to the next project using my personal income to fund it and the income form other projects to continue to build this snowball of awesomeness.Some people hate this because there is a lot of money sitting in the bank and money in the bank is losing money, but someday when I move onto larger multifamily deals and commercial buildings the repair exposure will shrink and so a portion of that capital can be redeployed!Like I said before I'm still a little wet behind the ears so I'd keep studying what these old cats say!