Financial ReservesFINANCIAL RESERVES
An important part of a successful rental property investment is holding proper cash reserves. Each property is different, therefore the amount of the reserve can vary
Some things to consider:
1. If the property is mortgaged, a good rule of thumb is to have three mortgage, tax, and insurance payments set aside as a reserve. If a resident does 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—which could be 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 in two weeks, another 6 weeks have passed before the first rent starts coming in. In this scenario, three months have passed without rent.
2. 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. In recent studies, a medium sized house that is middle aged will spend an average of $1,500 a year in maintenance expenses.
3. Resident turnover and rent ready expenses should be planned for. Painting, Carpet/Floor Repair, and other small upgrades may have to be done between Residents.
WHY HEALTHY RESERVES MATTERS
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 or not renewing their lease because they are unhappy. Not having to find a new Resident will save on leasing costs, vacancy cost, and rent ready costs. In addition, proper reserves will help you keep your contractual obligations to the bank, the city, and the Resident.