Rental property cash reserves: How much is enough?

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About This Episode

Episode #256 – What if you don’t get rent for 1 to 4 months? Or you have to replace your roof which costs thousands of dollars? How much cash reserves is enough to give you peace of mind and not go bankrupt? That’s the question Coach Carson tackles in this edition of the Ask Coach Podcast.

Episode Transcript


So you’ve got a rental property or you’re about to buy a rental property, but there’s something in the back of your head that’s bothering you that you know things can go wrong. Maybe you won’t get rent for a month or two or three or four, or maybe something will break, like you have to replace the roof and it’s going to cost thousands of of dollars. The bottom line is, you know, that you need a cash reserve, but the question is, how much do you actually need for a rental property? That’s the question I’m going to answer in today’s edition of Ask Coach and we’re getting started right now.


Welcome to the Ask Coach edition of the podcast. I’m your host, Chad Carson. You can also call me Coach. And this is a show all about helping you get out of the financial grind so you can do more of what matters in the Asked Coach editions, where I do my best to answer your burning questions about personal finance and real estate investing. Today’s question came from a YouTube user named Keeping It Super Simple.


And the question was very simple how big of a reserve do you need? I’m going to share some very specific numbers and approaches that I use to saving money for cash reserves in my real estate investing business. But I want to start off with a brief story to share why you actually need cash reserves in the first place. And I want to take you back to 2007 in my own real estate investing business. I had just begun in 2004 with a business partner.


I was 27 years old in 2007. And the first couple of years of our business, we grew slowly, but by 2007, we bought a lot of properties. We actually had 33 closings in one year. Some of those were flips that we’re making money just to put food on the table. Some of them were long term buy and hold rental properties.


Well, the problem was 2007, if you know your economic history was right before the Great Recession. So brilliant us, we decided to grow very fast right before the recession. Now, not all that was bad. We made a lot of money on some of those deals and we set a lot of that money aside in reserve accounts, which I’ll get back to you in a moment. But the negative thing was, because we grew so fast, because we were new, inevitably we made mistakes.


And so some of those mistakes cost us money. And for example, we underestimated repairs on some older properties that needed work and so we were over budget on several properties. It was also just the nature of the recession that we had vacancy, we had a lot of turnover, people lost their jobs, unfortunately. And so we had to reduce the rents a little bit, not too much, but also just have vacancy periods. So all that to be said, the lesson here is, especially when you’re new.


But really anytime as a real estate investor, uncertain things happen. You don’t know what’s right around the corner. The future is uncertain, and having cash reserves in the bank was really the saving grace for us, even with the mistakes we did make, because we piled up a bunch of money in the bank, we were able to draw on those reserves when we need them. And that was really the thing that got us through the Great Recession. We had friends who were in real estate investing, who went out of business, who probably were just as knowledgeable, who made some good deals as well, but didn’t have quite as much cash saved up and they went out of business.


So the lesson for us, really very poignant lesson right in the middle of the recession was you got to have cash reserves not only for those unexpected things, but also for the regular planning in your business. So think about the fact that you have taxes and insurance every single year. That’s one big payment probably at the end of the year. Well, cash flow planning is setting aside a little bit of money in a cash reserve account for things like that. If you don’t have an escrow account with your mortgage, your mortgage company might do that for you.


So that’s one form of cash reserves which I definitely recommend, even if you don’t have an escrow, set aside money for yourself. But the other one that I want to talk a little bit more detail about is setting aside money in a cash. You can think about it as an emergency fund for repairs and unexpected things that might happen in your business. Something else you might hear about when we talk about cash reserves is something called capital expenses. Now, when you think about repairs, as a rental property owner, you can have some repairs that are relatively small.


So you might have to call the plumber to fix a leak in the toilet or in the sink. They charge you 100 and $5250. And normally you can pay that out of your operating account. You can pay that out of your current rent that’s coming in. Hopefully you have enough in there to be able to do that.


But then sometimes there’s big expenses. These are things like replacing your heating and air unit, like replacing your roof. Maybe even one day you have to replace your driveway. That might have a long time until you have to replace it. But things like that break.


Everything in your property is going to wear out eventually. It’s just a matter of how long it’s going to take. And so those bigger ticket items are called capital expenses. And there are two ways to answer this original question we talked about in the very beginning. How much should you actually set aside for those types of things in this emergency cash reserve fund?


And I’m going to give you two different types of answers. I’m going to briefly give you technically the best answer, and then I’m going to give you the practical answer that I use and a lot of other real estate investors use. It’s just easier to apply. So technically the best answer is to take all of those different components in your property, the roof, the heating and air, the plumbing in your house, even the windows, think all the components that are eventually going to wear down and estimate those one by one, how long they’re going to last and then how old they are already. So, for example, if you have a roof that might have an expected life, an asphalt shingle roof, maybe it has a life of 25 years or 30 years, you could ask your contractor.


You can look it up online and let’s say that roof was just installed. So you have 25 years to go. You could estimate or get an estimate on how much that costs right now. And then you could project out into the future using some sort of inflation rate in a spreadsheet and say that roof today maybe cost $8,000, but in the future it’s going to cost $30,000. I’m just pulling a number out of the air.


I don’t know if that’s the right number. And then you could divide that $30,000 by the number of years you have until you expect to replace it. And then you’re going to set aside money every single year for that component. And then you do the same thing for every single one. Now you can create a spreadsheet.


You can Google this kind of spreadsheet, capital expense repair spreadsheets, and you could do this yourself. And I recommend it. If you are so minded to be technical and be very specific with those kinds of things, you can stick with it. That could be a good exercise. But from a practical standpoint, I want to give you another approach that worked pretty well for me that’s not quite as accurate, but is accurate enough to be able to handle some of the unexpected things that you run into.


I’m going to give you two different recommendations based on whether you have a very small rental property business, whether you have a larger one. And I’m going to give you examples in both cases. For my own life, my wife and I have one rental property that we used to live in and we kept it as a rental when we moved out. And then I also have a real estate investing business with a business partner that owns a larger number of rental properties. We have a little bit different approach for both of those.


But let me tell you about the first one. The first one is that when my wife and I had this rental property, we wanted to make sure to have some cash set aside in case something came up, mostly for repairs, but also in case we had vacancy we have a very small mortgage on the property, $400 per month. It’s a long term low interest mortgage that we might pay off eventually, but at this point we don’t plan on paying off. So just in case we had vacancy and we didn’t have rent for another three or four months or something, which has never happened, but it could. And so we just want to have that money set aside.


So we just chose the number $5,000 as a round number. That made us comfortable with that one property. We had enough just to cover the basics. If we had a heating and air expense, it would cover at least most of that. Maybe it wouldn’t cover all of it, but we wouldn’t be in a situation where we have to go raid other bank accounts or even borrow money.


Because if you don’t have this cash set aside, you’re basically having to go put money on a credit card, put money on a line of credit, which is going to cost you interest, it’s going to cost you money. And it’s also you get into a recession type period. I found that a lot of banks closed down credit accounts for some of my real estate investor friends. So what they thought was a line of credit that was available to them or a credit card was closed down because the banks at that point during a recession are often calling in their credit lines. They need money.


They don’t want to give out loans at that point. So you need cash in the bank. You’re basically being your own bank. So let’s say you had four or five properties. Five properties.


And you got up to using the same approach. You’d have $25,000 in the bank, which can cover a lot of things. So that’s approach number one. Very practical. Pick your number.


If you have a brand new property and you think 5000 is too much, maybe you put aside $3,000. Maybe you should put aside more if you’re more conservative. But that number worked for us. The other approach that we used was with a larger portfolio. If you were to get up to 50 properties and you’re setting aside $5,000 per property, you’re getting up to some pretty big numbers.


And we felt comfortable at some point not taking that same pace with all of our rental properties in our real estate investing business. And so we used a little bit different approach where we just looked at how much our expenses were on a monthly basis. So this included taxes, insurance, it included things like regular maintenance, included any utilities we had to pay for in some of our apartments, anything that we pay for as a rental property owner. And then also all of our mortgage payments. We figured out what that was on a monthly basis and we multiplied at times three.


So three times, whatever that is then. Now you know what your expenses are. So let’s just give you a real example. Let’s say you had those 50 properties, and I’m not sure if this is going to be exactly accurate for 50 properties, but let’s say $10,000 per month was the number of expenses you had and operating expenses, and you had another $10,000 a month in mortgage payments, that would be $20,000 total per month in your expenses. And then you multiply that times three, that’s $60,000 that you set aside in a reserve account.


So that might sound like a really big number for some of you who are brand new or you’re just getting one or two properties. But as you get more properties, some of the problems can get more expensive. If you have five roofs go out at one time during a tornado or some kind of emergency, yes, you might have insurance on those properties, but have you ever heard of some of these emergencies with a hurricane or tornado where insurance companies don’t pay you for a long time? That can happen. And you’re having to feed the cash to pay for some of those repairs in the short term just to get a roof back of your property so it doesn’t get damaged even more.


Those kinds of things happen. Who knows what can happen? So having a bigger chunk of money for $60,000, $100,000 was more in the range we were in 2007. We had over $100,000, so that we can then draw on that for whatever might happen if we needed it. So that’s the approach we take, either a set amount of money, $5,000 per property, or a set number of expenses.


X three. That’s the approach I’ve used with my own properties and it’s worked pretty well for us. I want to follow up on something that might be a concern or an objection in some of your heads as you think about setting aside large amounts of money in a savings account and just letting it sit there, often, never using that money. And you might be saying, hey, I’m growing my real estate investing business. I could use that $30,000 or $10,000 or $50,000 to grow my real estate investing portfolio.


Why would I set that money aside and slow myself down when I could be growing? And I just want to mention that there’s a constant tension as a business owner, as an investor, between this growth that you want to have and you want to get to your goals and you want to accomplish those things. And the tension is between addressing the risk that’s there that you might fail. And so the tension is always going to be a decision you personally have to make and you have to be able to sleep at night knowing that you’re comfortable with the risk you’re taking. But the cash reserve, you can think about it a lot like an insurance policy.


You’re basically self insuring some of the risks that might happen and the cost of your insurance that you’re doing this policy that you’re taking out, so to speak, is what you could have done with that money. So yes, you could have invested that money, you could have bought more properties, you could have produced more cash flow. But on the other hand, you could be like some of my friends in 2007 who didn’t have enough cash and you lost everything. You went out of business. Or even if you didn’t lose everything, what if the pain and the angst that you had to go through in order to survive financially a really tough situation.


So it’s really an insurance policy for your personal peace of mind and it really smooths out the cash flow ups and downs. That’s one of the most difficult parts about being an entrepreneur, is that there’s no consistency, especially early on with your cash flow. It goes up, it goes down, depending on how much income is coming in. Sometimes expenses go way up and so your cash reserve is really the thing that smooths that out and it makes sure you don’t get to the point where you have such a bad cash flow months that you start dipping into debt, having to borrow money, or even if you can’t borrow money, going bankrupt. That’s the definition of bankruptcy, is running out of money.


And I think about it a lot like a big fancy car. Like you had a sports car that had a huge engine and it was really fast. But if it does have any gasoline in the engine, it doesn’t matter. It’s going to be stuck on the side of the road. That’s what you would be like as a real estate investor if you run out of cash.


So cash reserves keep your car fueled up, they keep you on the long run of accomplishing your goals, maybe not quite as fast, it might slow you down a little bit, but it’s going to get you there in the end. I hope you enjoy this edition of Ask Coach. If you want to have one of your questions featured in a future episodes, there’s a couple of ways you can do that. Number one, just send an email to [email protected] and let me know in the subject that this is a question for Ask Coach that you like to have featured. You can also just participate on YouTube.


I love getting your comments there. Leave me a comment, ask a question, keep it as simple and to the point as you can. And I’ll also consider that for a future episode. If you like the show, I’d like to invite you to subscribe to my free email newsletter at


In addition to weekly updates, articles and behind the scenes tips from me, my email newsletter subscribers get my real estate investing toolkit, which includes a property closing checklist that I actually use when I buy properties. A real estate deal worksheet, a tenant screening criteria checklist and other spreadsheets and goodies that will help you on your journey to financial independence using real estate. You can get it all for free at I also want to take this time to thank the people behind the scenes who make this podcast possible each and every week.


This includes my podcast editor extraordinaire, Michael Nguyen, my amazing virtual assistant, Megan Thompson, my wife, Kari, who helps me behind the scenes and is my partner here at Coach Carson. And of course, thank you to all of you, the listeners of the show who make everything possible. This show exists for you. It exists because of you. And I really appreciate you being here for another episode.


Everything I’ve shared with you in this episode has been for general education purposes. I have not considered your specific situation or risk. Before buying your own investments, be sure to consult a financial, real estate and or a legal professional. Until next time, I’m Chad Carson. You could also call me Coach.


And this is a show all about helping you get out of the financial grind so you can do more of what matters. See you next time.


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