Author Topic: Cash on Hand per rental?  (Read 5045 times)

FastStache

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Cash on Hand per rental?
« on: August 18, 2013, 10:25:51 AM »
What are some rules people follow to determine how much cash to keep for repairs/vacancies etc for a rental?

x months of rent + y for repairs?


daverobev

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Re: Cash on Hand per rental?
« Reply #1 on: August 18, 2013, 10:38:30 AM »
x months of rent? Why? You mean x months of mortgage payment?

I'd just add 15% of gross rent per month, until it reaches a ridiculous level (more than a roof replacement perhaps).

Or in my case, if I manage to pick one up in the near future, it'll be with a LOC so excess money will pay that off faster, but be available to take out again if needed.

It depends how much other cash you have, what condition the place is in, and so on. If you've just rehabbed, new tenants on a 1 year agreement in a landlord-friendly place, then just build it up naturally.

arebelspy

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Re: Cash on Hand per rental?
« Reply #2 on: August 18, 2013, 11:06:02 AM »
Rules of thumb are places to start - general guidelines.  They are for initial planning.

One should dig past those when actually in the thick of it.

I would use a rule of thumb when making projections.  I wouldn't use it on properties I already owned.

What you need to do is evaluate the property itself and figure when you will have maintenance costs.  Project the roof replacement.  How much life is left on the water heater? 

Get the detailed expected depreciation and capital expenses for the individual properties in question and store that.  Add a buffer for downturns, extra repairs (that tend to group together, rather than being nicely spaced out), extra vacancies, reduced rent, etc.  Some of that will come down to what you are comfortable with, if the property has debt service or is free and clear, as well as your other sources of income that could potentially cover problems (are you still working, do you have a pension, do you have other income producing assets, how flexible is your spending, etc.)

That being said, if you just want a rule of thumb, here's the one I use (and yes, I realize by posting this everyone is going to ignore all of the above and just use the below, so you should be aware of that and purposefully ignore the below and do the above):
6 mo PITI + 20% of annual gross rent saved per property (for repairs, maintenance, etc.).

Again, this is so broad as to be almost meaningless (a property built in 2013 will probably need less maintenance than one built in 1972, some areas have higher vacancies, etc.), but there you go.
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Blindsquirrel

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Re: Cash on Hand per rental?
« Reply #3 on: August 18, 2013, 01:34:17 PM »
   Wow, I keep a heck of a lot less than that in cash. Have access to a good chunk in equity lines that I do not use though.  I keep enough cash to pay insurance, and next half a year of property taxes with no income at all off the houses plus a buffer of about 1 mo rent of rents. (27k ish total for 12 houses only 1 has a small loan on it) but I do not feel stressed if it is 15kish after paying property taxes) Anything beyond that has either gone to pay off the houses or to grow. Really low vacancy rate for SFR where I live. That said, I have access to really big chunks of cash if needed and both me and the DW have good paying somewhat stable jobs.  I would say, figure out how much cash on hand makes you sleep like a baby at night and then add 10-20% for a sound snooze. It is a long race not a fricken sprint. More people get hurt by too little cash on hand (or no back up) or over leveraging assets than by keeping too much cash.  My 2 cents and not worth much more than that.

arebelspy

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Re: Cash on Hand per rental?
« Reply #4 on: August 18, 2013, 02:07:27 PM »
It is a long race not a fricken sprint. More people get hurt by too little cash on hand (or no back up) or over leveraging assets than by keeping too much cash.

Well said.
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Another Reader

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Re: Cash on Hand per rental?
« Reply #5 on: August 18, 2013, 04:30:50 PM »
+1 for Blindsquirrel. 

I'm surprised at how conservative Arebelspy's rule of thumb is.  I like the 20 percent of gross rents for repairs rule, but I do not keep six months of PITI in cash reserves specifically for the rentals.  I do keep cash reserves for my expenses in the event of a cataclysmic market downturn or some other black swan event.  I grow and deplete the property tax fund every six months.  Insurance is a year round operating expense that I just cash flow - the due dates correspond to when I purchased the properties.  The fact that I do not depend on a job to pay any expenses makes a huge difference.  If I did, I would be much more conservative.

If you want to borrow money over the four loan limit, IIRC, you will have to have the six months of reserves described.

arebelspy

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Re: Cash on Hand per rental?
« Reply #6 on: August 18, 2013, 05:49:41 PM »
I'm surprised at how conservative Arebelspy's rule of thumb is.

I don't adhere to it myself, because - like I said - it's generic and one needs to look at their situation.  I can cover problems from my cashflow from my (quite secure) job, so I have less need for cash reserves.

It is one of the lines in my "Steps before FIRE" note on my computer.  I plan on having that amount of reserves.  Conservative?  Sure.  But when I cut ties, I'd rather not be biting my nails at some vacancies that hit at the wrong time.
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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.
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Another Reader

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Re: Cash on Hand per rental?
« Reply #7 on: August 18, 2013, 06:14:05 PM »
Multiple legs for the stool solves that problem....

By then you will have kids or be about to have them, so your responsibilities will have grown.  Without the pensions and personal cash reserves, I would lean towards reserving more specifically for the rentals.

FastStache

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Re: Cash on Hand per rental?
« Reply #8 on: August 19, 2013, 02:48:49 PM »
Thanks for the insight.

Since my only source of income is my job at the moment and it's a single income home, I would err on the cautious side.

6 months PITI + 20% of gross would definitely prevent most major disasters.

For those with lots of properties, I can see why you can relax on this number.

Thanks for the guidelines.

Blindsquirrel

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Re: Cash on Hand per rental?
« Reply #9 on: August 21, 2013, 10:36:15 PM »
   Wise move Grassshopper!

zinethstache

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Re: Cash on Hand per rental?
« Reply #10 on: August 22, 2013, 02:11:41 PM »
So far as part of our purchase process we stache 5% of the purchase price in the capital savings account. This covers our reserves (emergency fund) and deferred maintenance. Our properties will need roofs in the next 5 years so we will keep the full amount for that until we've done that big deferred maintenance on #1 and #2. We've spend about $450 on each unit for miscellaneous stuff in 2013. My DH has skills to do most maintenance himself. Budget-wise for basic maintenance, I have $1500 budgeted for the newer duplex and $3k for the old duplex... Will see how it all pans out. We also have a significant personal emergency fund. After a couple more rentals we might taper back on our total reserves. Since we have a few low interest debts used to help buy these properties, the first thing the reserves might do is pay off those OR we should be close to FI at 4 units so then it will be number crunching time, perhaps a chunk of reserve will go for down on #5 so we can get to FI?