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Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: 1tolivesimply on May 01, 2013, 09:22:16 AM

Title: How much do you keep in cash reserves per property?
Post by: 1tolivesimply on May 01, 2013, 09:22:16 AM
I keep accumulating cash from rents; I wonder if it is time to start using some of that cash to either fund other investments, or to start paying down the mortgages on the properties. How much do you keep in cash reserves per property? Just to get an idea, I understand it varies depending on age and many other factors.
Title: Re: How much do you keep in cash reserves per property?
Post by: MrMoneyPinch on May 01, 2013, 10:39:58 AM
This is a tricky question because many factors are important.
The first one is easy, the third one ils accumulated over many years, and the second one is learned by watching your expenses over a few years.

Sorry for going all kung-fu master on you, Grasshopper :)
Title: Re: How much do you keep in cash reserves per property?
Post by: Another Reader on May 01, 2013, 10:44:30 AM
Annual expenses (that account goes up and down over time, like at the property tax deadline) plus I reserve for one major repair per property every two years.
Title: Re: How much do you keep in cash reserves per property?
Post by: Karl on May 01, 2013, 10:44:48 AM
I have worked as a building manager, but not an owner.  The owner for whom I worked suggested putting at least 25% of monthly rent revenue into long-term, liquid savings vehicles.  He had found that this, in the business climate of the mid 1990s and based on his 30+ years of ownership experience, gave him a cushion that largely covered all three areas of expenses listed below.  This might work as a beginning rule of thumb until you have a few more years of experience with rental properties.
Title: Re: How much do you keep in cash reserves per property?
Post by: Villanelle on May 01, 2013, 11:18:03 AM
I think this depends on the property as well.  150 year old farmhouse vs. 4 year old condo--the amount needed to maintenance and repairs is going to be very different. 

I self-impound my property taxes.  Personally, I actually don't have much of a true vacancy fund since we can eat those costs out of our monthly expenses (decreasing other investments until the property is filled, etc.).  I want to keep those dollars working for me, and sitting in a savings account waiting for the what-if of a sustained vacancy isn't doing that.  But that's a conscious choice we made after running the numbers and realizing that we could live for many months, if not indefinitely, if the places are empty. 

We are getting to the point where our townhouse rental will need a new roof and exterior paint in the next few years.  Sadly, we live in across the world and can't do any of the painting ourselves.  So we've figured out about how much those are expected to be, and we are working up to that point, plus a few thousand extra for any unexpected major repairs. 
Title: Re: How much do you keep in cash reserves per property?
Post by: 1tolivesimply on May 01, 2013, 11:19:30 AM
Thanks for your input.

In my case, taxes and insurance are paid "automatically" through an escrow account every month.
So I would say the reserves are mostly for the other three items MrMoneyPinch mentions, surprises, major items & vacancies. I was thinking about $5,000 per property, although one of them is a condo, which I assume that, in theory, should require less of a reserve (no roofs to replace for example).
Title: Re: How much do you keep in cash reserves per property?
Post by: Johnny Aloha on May 01, 2013, 11:34:28 AM
I have a friend who retired at 38 after purchasing about 15 properties.  He keeps one month rent + deposit in each account.  He also has a seperate account of about $20k for any unexpected or deferred maintenance on his properties.  All of his properties meet rules of thumb (50% rule, etc) so there is a nice safety margin each month.

For my properties I have been accumulating the cash flow in order to purchase more.  So our cash reserve is quite high right now.  But I'll probably take the same approach - about $20k-30k liquid.
Title: Re: How much do you keep in cash reserves per property?
Post by: arebelspy on May 01, 2013, 11:48:25 AM
Right now I cash flow so much per month from my normal job (plus rentals as a bonus) that I don't worry too much about reserves (though anyone with a low savings rate - i.e. most people, including real estate investors - should have healthy reserves.)

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.

It's totally dependent on your personality, situation, etc. etc.  That's what my plan is, yours may be totally different.


EDIT: Obviously PITI implies I'll have mortgages.  Free and clear is a fine way to go to lower risk that comes with leverage, but I really want the inflation hedge of 30-year mortgages, so I'm planning on keeping the mortgages, rather than paying them off.  Thus my potentially more conservative numbers in terms of reserves. /END EDIT
Title: Re: How much do you keep in cash reserves per property?
Post by: JasonK on May 01, 2013, 11:52:08 AM
I'm in the same boat (three rentals) and I keep $25K on hand, although I don't escrow taxes AND this number includes the tenant's deposits.  So your $15K number ties in closely with mine.

Saying that, I do have a chunk of my investments in Vanguard funds, so I can always draw on that liquidity when needed, although I never plan on it.  And I live well below my means, so I cash flow heavily from my salary each month.

So I would say $15K sounds adequate if you have liquidity somewhere or monthly personal cashflow from work.  If not (for example, if you're putting everything into more real estate) I'd double that number, to $30K.
Title: Re: How much do you keep in cash reserves per property?
Post by: Villanelle on May 01, 2013, 01:45:33 PM
$5000 could be plenty, or not nearly enough, depending on the mortgage, rent, and age and condition of the properties.  For our property, $5000 is 2 months rent for one property, so unless I can cash flow elsewhere, that wouldn't be enough if I only have 1-2 properties. If I had more, then $5000k each would might be enough, because it become less and less statistically likely that all of the properties will be empty and need new roofs at the same time. 
Title: Re: How much do you keep in cash reserves per property?
Post by: 1tolivesimply on May 01, 2013, 02:05:24 PM
Right now I cash flow so much per month from my normal job (plus rentals as a bonus) that I don't worry too much about reserves

I'm on the same boat myself, however, I like keeping my finances separate from rentals' income/expenses. Obviously, if something crazy happens, I would definitely use my money to pay for it, but assuming no major repair exceeds $5000, I shouldn't need to "touch" my own money.

For my properties I have been accumulating the cash flow in order to purchase more.

Unfortunately, in my market, it's getting harder and harder to find good deals, I think the good times are long gone; If I buy another property, it'll most likely be for me to live and rent out my current home.
Title: Re: How much do you keep in cash reserves per property?
Post by: Another Reader on May 01, 2013, 02:16:16 PM
It also depends on how many properties you have.  If you have more than a few, expenses and capital improvements smooth out and become more predictable.  Right now I count on replacing one A/C unit and two major A/C repairs every year.  One to two water heaters a year.  A roof every 4 to 5 years.  That sort of thing.
Title: Re: How much do you keep in cash reserves per property?
Post by: arebelspy on May 01, 2013, 02:30:35 PM
Right now I cash flow so much per month from my normal job (plus rentals as a bonus) that I don't worry too much about reserves

I'm on the same boat myself, however, I like keeping my finances separate from rentals' income/expenses. Obviously, if something crazy happens, I would definitely use my money to pay for it, but assuming no major repair exceeds $5000, I shouldn't need to "touch" my own money.

I don't understand this idea.  Cash is fungible.

Yeah, you want your properties to support themselves, but keeping extra cash reserves "separate" from your finances unnecessarily (and taking a lower than necessary return on them) just for the sake of keeping them separate (and no other actual reason, given the ability to pay for a disaster or vacancy otherwise, the main reason for cash reserves) is silly to me.

It's like someone to me who is trying to pay off debt, finds $100, and goes out to dinner to celebrate.  It's all your money.  Who cares if you set it aside and say "that money came from rental profits" and then something breaks and you pay for it out of those funds and feel good about that or you collect the rental profits and disburse them to yourself (and use them to invest in another one, or stocks, or whatever) and then when something happens (say, broken A/C) you pay for it out of your cash flow from your job.  Same difference.  To me, being able to invest it right away instead of setting it aside is mathematically superior, so I don't care about only setting rental profits aside for rentals.

But to each his own.  If it makes you happy, knock yourself out.  :)
Title: Re: How much do you keep in cash reserves per property?
Post by: MrMoneyPinch on May 01, 2013, 04:25:44 PM
Right now I cash flow so much per month from my normal job (plus rentals as a bonus) that I don't worry too much about reserves

I'm on the same boat myself, however, I like keeping my finances separate from rentals' income/expenses. Obviously, if something crazy happens, I would definitely use my money to pay for it, but assuming no major repair exceeds $5000, I shouldn't need to "touch" my own money.

Well 5k$ is better than zero, but it is still an arbitrary number.   The right amount depends on the type and size of the property, the minimal expenses to maintain it, etc.

In my parts, windows and doors are good for 15 years (more or less) and roofing is typically good for 20-25 years (do not expect shingles to last longer than the guarantee), so you set aside enough over time to make the next changes a scheduled expense instead of a problem that makes a hole in your cashflow. Also, a big bill divided by 15 or 25 years is suddenly a minuscule amount, and is still yours until the bill comes :)

Next, I will clarify "regular surprises":  faucets will leak.  Tenants will ask for new locks, electric sockets, light fixtures, etc. once in a while because they are no good anymore.  Keep track of these "one-time" expenses and make sure to budget for them.  If for a given year you don't have that much spent, adjust the mean amount and then you can use the difference for something else.

Do not underestimate the power of vacancies.  This is the place where you transform your landlord life by removing a regular source of stress.   5% vacancy is about a month every two years, which is not much if you have a SFH.  Vacancies are caused by time between tenants of course, but also when you must do renovations and can't possibly have tenants around or you have to give them a rent holiday as a compensation for the inconvenience.   Vacancies are also caused by tenants not paying for any reason (aka. deadbeats), and this occurence is never limited to a month at a time.   If you have accumulated that 5% and have a stellar client for 2-4 years, you will have some time to spruce up the place before renting it again, thus getting a better rent from the next tenant (and compounding the win!).

Take the time to estimate the above factors BEFORE taking money out from your landlording business.  In the case of multi-unit buildings and it takes experience before you can eyeball those numbers, so sit down and do some number-crunching.  Try to know how long since the roof, furnace, windows and other big-ticket items have been replaced, find out how long is their remaining service life and get price estimates for their replacement by professionals.  If you get to DIY a job, pay yourself the difference when it is done for being a badass :)

Now, some here seem eye these funds for spending because they think it is "sleeping money". Nothing is stopping you from investing it, IF you do it in such a way that it will be avaliable in advance.  Taxes?  use a high-interest savings account.  Vacancies?  depends on your property, but I like to keep that in the savings.  Your roof is due in 5 years or more?  Balanced portfolio.

I have partners, so keeping finances separate is a requisite for me;  if you are the captain of your own ship, doing the same will trick you in thinking that your cashflow is lower than reality in good years and unaffected by bad years except if you have a REAL surprise (flood? tornado? act of God?).  I consider that most "surprises" experienced by landlords are entirely previsible.
Title: Re: How much do you keep in cash reserves per property?
Post by: arebelspy on May 01, 2013, 04:34:38 PM
I have partners, so keeping finances separate is a requisite for me;  if you are the captain of your own ship, doing the same will trick you in thinking that your cashflow is lower than reality in good years and unaffected by bad years except if you have a REAL surprise (flood? tornado? act of God?).  I consider that most "surprises" experienced by landlords are entirely previsible.

Keeping track separately is key, I agree.  Physically losing a bunch of opportunity cost holding reserves you can more than easily cash flow just to have it sitting separately?  Meh.

YMMV.
Title: Re: How much do you keep in cash reserves per property?
Post by: Another Reader on May 01, 2013, 04:38:30 PM
+1 for MrMoneyPinch.  Unlike your paper assets, owning and operating rentals is a business.  Treat it like a business and you will have a better understanding of how well your rentals are performing and you will have the reserves set aside and available to deal with problems.  Half the investors I know could not tell you whether they are making money on their rentals or not, because they fail to keep the money and the accounting for the rentals separate from their personal money.
Title: Re: How much do you keep in cash reserves per property?
Post by: en dub on May 01, 2013, 04:54:14 PM
Physically losing a bunch of opportunity cost holding reserves you can more than easily cash flow just to have it sitting separately?  Meh.

Once you get past a certain point, you should definitely keep something in reserve. And how much opportunity could you be missing out on with a few thousand dollars? Where would you park it instead, while you wait for a new roof? The stock market?
Title: Re: How much do you keep in cash reserves per property?
Post by: MrMoneyPinch on May 01, 2013, 05:04:21 PM
Physically losing a bunch of opportunity cost holding reserves you can more than easily cash flow just to have it sitting separately?  Meh.

Once you get past a certain point, you should definitely keep something in reserve. And how much opportunity could you be missing out on with a few thousand dollars? Where would you park it instead, while you wait for a new roof? The stock market?
I did just that.  60% stock/40% bond is statistically OK if you have 5 years or more before expending.  Also, the profit generated neatly takes care of the inflating cost of the repair.

Title: Re: How much do you keep in cash reserves per property?
Post by: arebelspy on May 01, 2013, 05:18:13 PM
Physically losing a bunch of opportunity cost holding reserves you can more than easily cash flow just to have it sitting separately?  Meh.

Once you get past a certain point, you should definitely keep something in reserve.

Of course.  That's not what we're discussing.  We're discussing when you're well before that point, can easily cash flow from your job (hopefully a secure one, otherwise again, you'll want an emergency fund personally anyways) to cover vacancies and major repairs, yet keep 20 grand sitting separate as it has come in from rental profits just for the sake of keeping them separate.

That, to me, is silly.

Again, cash is fungible.  People with the other mindset seem to disagree on that, apparently.
Title: Re: How much do you keep in cash reserves per property?
Post by: MrMoneyPinch on May 01, 2013, 05:31:00 PM

Of course.  That's not what we're discussing.  We're discussing when you're well before that point, can easily cash flow from your job (hopefully a secure one, otherwise again, you'll want an emergency fund personally anyways) to cover vacancies and major repairs, yet keep 20 grand sitting separate as it has come in from rental profits just for the sake of keeping them separate.

That, to me, is silly.

Again, cash is fungible.  People with the other mindset seem to disagree on that, apparently.

Of course, but I am a wuss, and having a roller-coaster ride with my cashflow always steals my sleep, reducing my capacity to generate income and/or be a good lover.  Better to have a secondary stash allocated to landlording and live an easier life.
Title: Re: How much do you keep in cash reserves per property?
Post by: arebelspy on May 01, 2013, 05:49:25 PM
Sure.  To me, it's all my money, regardless of what account it's sitting in.  If compartmentalizing it helps you sleep at night, by all means, do it.

Like I said, if it makes you happy, knock yourself out.  :)
Title: Re: How much do you keep in cash reserves per property?
Post by: 1tolivesimply on May 14, 2013, 10:07:47 AM
Yeah, you want your properties to support themselves, but keeping extra cash reserves "separate" from your finances unnecessarily (and taking a lower than necessary return on them) just for the sake of keeping them separate (and no other actual reason, given the ability to pay for a disaster or vacancy otherwise, the main reason for cash reserves) is silly to me.

Yeah, this makes a lot of sense, I didn't look at it that way.
Title: Re: How much do you keep in cash reserves per property?
Post by: Johnny Aloha on May 14, 2013, 12:42:59 PM
Thanks to ARS for making me look up the word "fungible".

http://en.wikipedia.org/wiki/Fungibility