Rental properties have been a great investment for me, but they can be expensive to buy. Although you can make a lot of money from rental properties, it takes a lot of money to buy rental properties and you must have money in reserves to handle vacancies and maintenance. I have 16 rental properties and it has taken a lot of cash to purchase them. They also have maintenance that comes up or will go vacant at times. I have to keep money in reserves for maintenance and vacancies and the bank will also require me to have money in reserves for rentals as well.
You have to have money set aside to handle vacant months and repairs. Most repairs are minor items that do not cost a lot of money, but some repairs like replacing a roof can cost $5,000 or more. Many times repairs are done when a house is vacant, which means you will not be receiving rent and you have to pay for repairs.
For more information on my rental properties and investing strategies check out my complete guide to investing in long-term rentals.
How much money will a bank require to have in reserves on rental properties?
The money you need to keep in reserves depends on many factors. Older homes will need more maintenance and some homes will have more vacancies than others. One rule of thumb is what lenders will require investors to have in reserves before they will give them a loan. Most lenders require at least 6 months in reserves for all mortgages in an investor’s name. To figure how much cash you would need add up all your mortgage payments, including your personal residence and multiply them by 6.
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16 flips currently in progress. 159 flips completed. 19 rentals properties.
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A bank will require all the minimal costs required on an investor’s mortgages to be accounted for when calculating reserves. Taxes and insurance will be counted when calculating the reserve requirement as well as the mortgage payment. On my rental properties, my mortgage payments which include taxes and insurance range from $450 to $650 a month. I also have to account for my personal residence mortgage payment which is over $2,000 a month. I have 16 rentals, but two of those properties have no loans against them. In total I need over $50,000 in cash reserves to show my bank that I am in a good enough financial position to purchase more rental properties.
Is 6 months of mortgage payments enough reserves for a rental property?
How much in reserves you need will vary with each investor and the properties they own. A huge factor when considering how much money in reserves you need is how much cash flow your rental properties are producing. If you have minimal or negative cash flow you will need much more in reserves. Having to cover part of a mortgage payment on top of paying for vacancies and maintenance can add up quickly. Most banks will also consider the cash flow an investor has on their rental properties when making loans. If you have little to no cash flow it will be harder to qualify for more loans. I suggest buying rentals for cash flow and not appreciation, but if you do have negative cash flowing properties you should have more in reserves than 6 months of mortgage payments, taxes and insurance.
If you have a lot of cash flow coming in from your rental properties you should be able to build up reserves quickly. If you find you are short on cash, I would save cash flow you have coming in until you have a decent amount of reserves saved up. Many of the problems investors run into are easily solved if they invest for cash flow!
If you have one or two rentals you may need more in reserves
If you have one personal residence with a mortgage payment of $700 a month and a rental property with a $500 a month mortgage, you would only need $7,200 in reserves according to bank requirements. However, that is not much money if you have to make major repairs on your rental property. If you have to replace the roof that could wipe out the entire reserve you have in place. You better hope the home stays rented and no other repairs come up while you build the reserve back up again. I think an investor should have at least $10,000 saved up in reserves for their rental properties no matter what the bank says your reserves should be. This assumes your rental properties are basic houses that are in decent condition. If you have old rental properties that are in need of maintenance, you may need to save even more.
The money you keep for reserves on rental properties should not be used for other things
When you have a reserve for vacancies and maintenance on your rental properties, that money should not be used for personal items or buying more rental properties. You never know when you might need to evict someone or make major repairs. If you don’t have the money to complete an eviction or make repairs, you could have major problems renting the home. If you can’t rent the home, you will not be able to bring in more money to cover the expenses. You may find yourself in a big heap of trouble and forced to sell the property.
Conclusion
Rental properties are expensive to buy; it usually takes at least 20% down and to get a great deal you may have to make repairs as well. You have to save more money than what the down payment and repairs will cost you. You need to make sure you have reserves to carry you through the rough times. For more information on financing long-term rental properties, fix and flips or owner occupant homes, check out my E book: How to Finance Multiple Rental Properties. The book explains how to get loans for multiple rentals, for fix and flips or for an owner occupied home. The book is available at Amazon or in PDF format.
For more information on how to buy the best rentals which will make the most money, check out my book: Build a Rental Property Empire: The no-nonsense book on finding deals, financing the right way, and managing wisely. The book is 374 pages long, comes in paperback or as an eBook and is an Amazon best seller.
Thanks Mark! Really enjoyed your blogs, books and youtube videos!
Thank you!
This is a great site for realistic property investment advice. Keep it up!
Mark
I love reading your blogs/articles…I find myself at work reading them lol. You and I both look at real estate the exact same way. Thanks for all the stuff you put out! Keep it coming!
Thank you Chance!
Thanks for your articles Mark, I now own two properties and most of my inspiration and enthusiasm comes from reading your articles often, sometimes more than once. The first property I have rented out for $500 a month, and I bought it for just over 23k. The tenants are very happy, but it is an old home and will need windows and roof repair in the not too distant future I fear. My second property we just bought about a month ago and I’ve ripped out the carpets and installed laminate flooring, which looks incredibly better (the carpet was completely disgusting, and would have not looked much better even if it was cleaned multiple times). We bought this second home which is a duplex, for 29k (it appraised for 50k) I’m planning on renting it out for $775 a month, Lord willing. We don’t have much as far as cash reserves go, and with the other house as old as it is – this article is a very healthy reminder for us to save up before we go buying property #3. I truly admire your determination and courage in your goal to reach 100 properties. It will certainly be an adventure reading about your development as I continue to follow in your footsteps. My ultimate goal is to completely replace my income (around 45k) as a Youth Pastor so that I can be a missionary without having to raise support from anyone else. I am also a musician, and I want to own and operate my own recording studio. Having all these dreams in mind helps me focus and keep pressing on toward that goal. I believe I’ll need 15 properties to fully replace my income and do what I want to with my life. I’ll be checking back often to read your posts and gain wisdom from your experiences. Thanks again!!!
Thanks Jonathon!
Those are good numbers, but yes you do need to save up some money for repairs.