Author Topic: Appropriate savings cushion for taxes/repair on SFH rental?  (Read 1937 times)

brandino29

  • Bristles
  • ***
  • Posts: 321
Appropriate savings cushion for taxes/repair on SFH rental?
« on: September 26, 2013, 09:11:56 AM »
Our first mortgage payment is coming up next week on our first rental property.  We've already got a renter in there paying $800 a month, our total mortgage payment including PIE is $392 minimum ($52k for 30yrs at 3.75).  I know there is a strong argument to take the savings and invest into index funds but we'd like to pay extra toward the principal.  I ran through a mortgage calculator and found if we pay an extra ~$258 per month, we'll be on track to pay off the loan in 10.5 years, saving $23,650 in interest payments over the life of the loan.  That will leave us a cushion of $150 per month ($800 in rent minus $650 total payment to bank) to put into the savings account for the home to cover taxes and repairs. 

Does that sound like too little, too much, or just about right in monthly cushion ($1,800 annually)?  My wife and I have a combined total take home pay from our regular jobs around $90k pre-tax annually and we do not have the rental in a separate LLC. 

We opened a new checking account specifically for this rental so any transaction that's related to the home (rent in, mortgage out, repairs, taxes, etc) will come from that account.  My thought is that we'll limit the savings cushion in that account to around $2,000 and if at anytime it grows much beyond that, we'll withdraw the extra and either put it toward the rental as additional principal or perhaps invest it into index funds. 

Another Reader

  • Walrus Stache
  • *******
  • Posts: 5109
Re: Appropriate savings cushion for taxes/repair on SFH rental?
« Reply #1 on: September 26, 2013, 09:22:28 AM »
The cost of capital improvements sadly does not vary much with the price of the house.  Water heaters, furnaces, and A/C units cost pretty much the same.  I like to have a minimum of $5,000 in cash reserves for a house.  Once I had a lot of houses, I could take a more statistical approach and keep less per house.  If the house is brand new or this is a condo, you could have less, but you still need to have access to enough cash or credit to take care of an emergency.

TrulyStashin

  • Handlebar Stache
  • *****
  • Posts: 1030
  • Location: Mid-Sized Southern City
Re: Appropriate savings cushion for taxes/repair on SFH rental?
« Reply #2 on: September 26, 2013, 12:44:41 PM »
If you take all of the $400/ mo you're getting, above the mortgage cost and save it, then in 18 months you'll have the $5k cushion Another Reader recommends.  After the 1.5 years, you can start re-allocating that money toward paying down the mortgage or some other investment.  Seems like a reasonable approach and 18 mos. of stashing this cash isn't too much of an opportunity-cost.

SunshineGirl

  • Pencil Stache
  • ****
  • Posts: 749
Re: Appropriate savings cushion for taxes/repair on SFH rental?
« Reply #3 on: September 28, 2013, 05:36:02 PM »
With numbers like that, I think you might be better off using the excess to purchase another rental.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28104
  • Age: -999
  • Location: Seattle, WA
Re: Appropriate savings cushion for taxes/repair on SFH rental?
« Reply #4 on: September 28, 2013, 08:41:44 PM »
Previous discussion here: http://www.mrmoneymustache.com/forum/real-estate-and-landlording/how-much-do-you-keep-in-cash-reserves-per-property/

My thoughts remain the same (especially with regards to being able to cash flow an emergency - i.e. what is your savings rate and how stable is your job).
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.