Financial Reserves

An important part of successful rental property investment is proper cash reserves. Each property is different, therefore the amount of the reserve can also be different. Some things to consider:

• If the property is mortgaged, a good rule of thumb is to have three mortgage, tax, and insurance payments as reserve. If you have a Resident not pay rent, it can take a month or longer to get them out of the property. Then you will have to repair, clean, and get the property ready for the next Resident—another two weeks. Once ready, the property will be marketed. If the property is on the market one month and then a lease is signed starting is two weeks, another 6 weeks has passed before the first rent starts coming in. In all, three months have passed without rent.
• Funds should be set aside for maintenance. Some maintenance needs to be done right away and can be expensive such as a new water heater or furnace.
• Resident turnover and make ready expenses should be planned for. Painting, fresh carpet, and small upgrades may have to be done between Residents.

By having a reserve, you will decrease the stress of owning a rental property and will actually make more money. For example, the ability to quickly replace a bad water heater can mean the difference between the Resident leaving because they are unhappy or renewing their lease. Not having to find a new Resident will save on leasing costs, vacancy cost, and make ready costs. In addition, proper reserves will help you keep your contractual obligations to the bank, the city, and the Resident.