The Erentspayment problem is a very unique situation, but has happened before. There have been countless stories where a property manager misspent funds or went bust. But, its an unknown, unknown. You don't know, to know, to plan for an event like that. Where as maintenance and capex are known issues at generally unexpected times. Erents issues is basically on the level of a catastrophic event or a once or twice in a lifetime event. Sort of like a flood, earthquake, or hurricane.
I really think one should have two categories of reserves, those being "Property Reserves" and then "High Liquidity or Credit".
General Property Reserves are there to help with vacancy, maintenance and capex. Items that you know are coming at some point. My rule of thumb has changed over the years. As I am now in all multifamily, and have more units, I am less worried about vacancy as I was when I had my first one or two units or was only invested in a SFR. Then also as my unit count has grown, I felt less of a need for larger reserves as I could easily absorb costs. As an example, if you have one unit with $1,000 in gross rents then get a $1,000 maintenance cost, its a big hit. Where if you have 10 units with $10,000 in gross rents, that $1,000 cost is easier to absorb.
High Liquidity - by having some other assets, not necessarily set as reserves, with higher liquidity, you can weather a storm like the Erents issue. An example would be money in CDs, or a brokerage account (non retirement). This is money that is invested in another means, but, in a tight spot you could pull it if needed. If you had an open, but unused HELOC, you could pull on it.
Diversity - by having a larger portfolio of units, with different property types (SFR, small multi, medium/large multi, retails, office, etc.) spread across different MSA you can help set yourself up to better absorb any catastrophic loss. As an example if you are invested in three MSA, and one MSA has an economic downturn from say a military base closing, you are better prepared. Or say you have mountain and coastal properties, and a hurricane hits, your mountain properties can help carry you while you coastal properties recover. But, with the Erents issue, if had all your diversified properties with Erents, you would still have a catastrophic loss. This is where High Liquidity comes in.
Insurance, Leverage & Living Below Your Means - lastly, I think these three topics play into reserves. If you have good insurance with rent loss coverage, are not over leveraged (low mortgage costs), and live below your means it’s easier to absorb hits. An example is if I generate a net of $5,000 a month, but only need $2,500 to live on, I can absorb higher maintenance costs and not affect my standard of living. Another example, I had a property fire in one unit of a quad a couple years ago. This fire, while caused some mental stress, financial didn’t even cause me a bump in the road. I had three other units in the building generating rent, my insurance covered all the repairs, I didn’t need to spend any money up front for repairs and in the end I was compensated for rental loss.
Lastly, I want to add as we have been in a very long bull market, to me it makes sense to deleverage a bit (get rid of that one problem property), build up higher reserves, and start to trim extra unneeded expenses to be ready for a downturn.
