I couldn't imagine being successful in this business without being one...and having a real estate license gives you the power to control pretty much every aspect of your transactions.Here are more of my thoughts on the topic (if you never read anything else I ever write, I recommend this one):http://www.biggerpockets.com/renewsblog/2010/02/10/controlling-your-real-estate-deals-manage-catastrophe/

If he only would have lowered his price sooner, he may have avoided catastrophe.

This way, I'm covered when it's time for resale.If you learn of something during the inspection--something that could be financially catastrophic, or whatnot--you have an opportunity to back out of the deal.

The usual: divorce (especially in a community property state), health problem for you or a family member, uninsured/underinsured catastrophic loss for you or a family member (such as a personal injury car accident), a self-employed tax problem/debt, etc.The less usual: a local water district concluding that the water in the entire area causes leukemia or other cancers and therefore no houses are habitable (which is very possible in some areas of Texas), a prolonged drought that causes the local portable water supply to dry up, a major employer or employers moving out of the area/closing, one tenant (or other person) getting hurt on the property (and getting a multi-million dollar judgment against you), one local tax agency assessing a property tax on your property (I had one try to assess a $100K tax to fund an adjacent highway improvement....), etc.

To answer you question in short, I see 5 - 10% rent should go to unexpected repair and major catastrophe costs.However, to be conservative, you want to make sure you dedicate half the value of your rent (50% rule) to cover all expenses, not including mortgage.

This was a huge oversight because I have funded everything with cash on hand and could have suffered a total loss of my investment if something catastrophic would have occurred I am about to close on another and will be buying this policy from here on out.

Seemed like the perfect time to throw some money at it as all calculations I made, pointed to the fact that short of some catastrophic chain of events like Detroit Metro becoming a ghost town, it was going to be hard to lose money.

I wouldn't because that $1,000 saved would only pay for a few hours of my attorney's time in the event of a catastrophic event. 

The high level of natural catastrophes (hurricanes, flooding) just make it a difficult market to write policies in and not pay out more than they charge.

Of that 255K, personally I would only spend maybe 240K maximum on a property and keep 15K in reserves for taxes, minor repairs, etc.... and each of you could still fund up to the remaining 15K each left in the smaller account for a total of 45K more in the case of a major catastrophe (out town recently flooded and there was a lot NOT covered by insurances).