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Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: EAL on April 27, 2015, 08:33:47 AM

Title: Emergency funds to cover rentals
Post by: EAL on April 27, 2015, 08:33:47 AM
What type of emergency funds does everyone keep liquid for their rentals?

Give a little more detail as to whether they are paid off or have a mortgage and what the mortgage is a month vs. what they bring in so we can see the various factors that impact your decision making. Also, do you keep a big fund? Or keep a designated amount per rental home?
Title: Re: Emergency funds to cover rentals
Post by: zephyr911 on April 27, 2015, 10:18:02 AM
What type of emergency funds does everyone keep liquid for their rentals?

Give a little more detail as to whether they are paid off or have a mortgage and what the mortgage is a month vs. what they bring in so we can see the various factors that impact your decision making. Also, do you keep a big fund? Or keep a designated amount per rental home?
I don't reserve emergency funds. I keep it all invested. MMM didn't teach me this approach, but he does advocate it:
http://www.mrmoneymustache.com/2011/04/22/springy-debt-instead-of-a-cash-cushion/

Most expenses can go on a credit card for 30-60 days (depending on billing cycle timing) without interest, and if I don't accumulate enough cash by then from normal revenue, I can liquidate something to pay for it, or line up temporary financing until I can pay it off.

All my properties are financed. Later on as I pay down the debts on both my residence and the rentals, I'll probably use a HELOC for any surprises - the rate is much lower than my typical ROI, it's tax-deductible, and it'll be large enough to cover anything.
Title: Re: Emergency funds to cover rentals
Post by: johnhenry on April 28, 2015, 08:15:03 AM
I don't have a hard-fast rule for this.  And instead of an "emergency fund" I think of the cash I keep on hand as an "operating account".  Rent, late fees go in, regular cash outflows like insurance, mortgage, maintenance, utilities (when vacant) go out.  But part of that account (or separate account) is the security deposit of each tenant. If you have 2 places that have rent/deposits of $1000 each, you can lose $2000 pretty quick if two tenants happen to move out at once.  Don't forget to keep those liabilities readily available and maybe even in a dedicated account.

If you have (and plan to use) a HELOC for big ticket capital expenditures, you won't need a huge cushion.

I probably keep in the operating account, between 2.5 and 7.5% of the property value.  For each $100K in property, $2500-7500 in addition to security deposit liabilities.
Title: Re: Emergency funds to cover rentals
Post by: iamlindoro on April 28, 2015, 08:55:14 AM
When I work the numbers for a property I'm thinking of buying (and I'm still relatively new to this) I do them with a absolutely grim worst-case scenario.  If the cashflow even in the worst case is still acceptable, all other things being equal, this is one I consider purchasing.  Once I acquire the property, I set up automatic transfers from the RE Investment account in the amount of the "safe" cashflow, leaving all other money as a reserve/operating budget.

Beyond 5 financed investment properties, Fannie Mae requires you to keep six months PITI onhand for all properties, though that strikes me as way too low for reserves.  At some point, once I have enough properties, the risk should be fairly well diversified and I'll cap the reserve/capital budget somewhere about 50-75K (on 15 planned properties) and take all further income as cashflow.  If the reserve drops, I'll refill it again from cashflow.
Title: Re: Emergency funds to cover rentals
Post by: Another Reader on April 28, 2015, 09:52:52 AM
Undercapitalization is the Achilles Heel for most real estate investors.  I have over 25 properties, all single families except one, and I think somewhere around $100,000 is the correct amount of working capital/reserves for my situation.  I'm well below that right now because of the capital improvement cycle, and I'm not happy about it.  I expect 1-3 A/C units to need replacement every year, roofs are coming up or were just done, and I recently experienced several expensive turnovers.  iamlindoro is correct, as you get more properties, the risk is diversified.  I like his approach on cash flow as well. 
Title: Re: Emergency funds to cover rentals
Post by: zephyr911 on April 28, 2015, 10:52:54 AM
I don't have a hard-fast rule for this.  And instead of an "emergency fund" I think of the cash I keep on hand as an "operating account".  Rent, late fees go in, regular cash outflows like insurance, mortgage, maintenance, utilities (when vacant) go out.  But part of that account (or separate account) is the security deposit of each tenant. If you have 2 places that have rent/deposits of $1000 each, you can lose $2000 pretty quick if two tenants happen to move out at once.  Don't forget to keep those liabilities readily available and maybe even in a dedicated account.

If you have (and plan to use) a HELOC for big ticket capital expenditures, you won't need a huge cushion.

I probably keep in the operating account, between 2.5 and 7.5% of the property value.  For each $100K in property, $2500-7500 in addition to security deposit liabilities.
I'm legally required to keep deposits in a separate account here, and can't use them for maintenanace - even emergencies.
Title: Re: Emergency funds to cover rentals
Post by: SUP on April 30, 2015, 04:21:38 AM
3 months expenses in a liquid low risk investment. You'll sleep at night. Be able to buy more. And this is scalable. So every property we buy we increase the reserves by 3 months worth of expenses. I'll admit we use it all the time so we don't have to use investments or sell anything. We use it sometimes when buying and just replenish it. Any major repairs we know its there and use it.
Title: Re: Emergency funds to cover rentals
Post by: arebelspy on May 06, 2015, 10:16:53 AM
"Emergency fund" is for personal accounts.

"Reserves" is the generally used term for real estate owned for investment purposes.

I don't have an emergency fund.

I do keep plenty of reserves for my rentals.

Previous threads discussing this exact question, with the answers you are looking for:
http://forum.mrmoneymustache.com/real-estate-and-landlording/how-much-do-you-keep-in-cash-reserves-per-property/
http://forum.mrmoneymustache.com/real-estate-and-landlording/cash-on-hand-per-rental/

I said at the time:
Quote
In FIRE my plan is to have 6 mo. PITI for each property + 20% of annual gross rent per property (for maintenance items that arise).   It'll likely come to over 6-figures in cash, but it'll let me not worry about vacancies, repairs, etc.

I plan on sticking pretty close to that, though it'll actually be about half that six-figures due to purchasing a number of properties with cash (so the PITI reserves is lower).

That's a fairly conservative number, IMO, but better to have some cash idling at a low return (in CD ladders, or whatever) than risk your FIRE plan by being undercapitalized.