How Much Cash Should You Have Reserved For Your Property?

THE DO’S AND DON’TS WHEN IT COMES TO KEEPING CASH RESERVES FOR YOUR RENTAL PROPERTY

Cash reserves are important in general because they add comfort and a safety net. It’s fully logical to think about keeping cash on the side should any costly issues arise. Roof repair, costly evictions, or a series of maintenance needs can really pull at your feeling of profitability. But is earmarking that money for this use the right approach?

Many subscribers and regular readers know where we’re going here…the themes and principles are virtually universal: When answering this question, and so many others, the best path for you is based on:

What your goals are
What motivates you
Your vision, trajectory, and timeline

PERSONALITY 1: THE CASUAL PROPERTY OWNER

If you own a rental property or two and are content with the income and lifestyle that affords you, we’re referring to you. You might not have a lot of experience or maybe you inherited a property and know it’s smart to hold on to it. You probably don’t work with a property manager and you don’t have significant cash flow coming in.

In that case, a safety net makes sense…so the answer is yes, you should keep a cash reserve. $5,000 per property is appropriate and $10,000 is ideal. Assuming no other source of income to borrow from (like an investor with 4 or 5 properties would have), it makes sense to create a buffer between you and financial hardship. You’re really doing what you can to insulate yourself from a big hit. If you are able to build that reserve comfortably, it might make more sense to look into hiring a professional. Many successful property management companies, like Nexus Property Management®, will cater specifically to owners of one or two properties. By investing 6-8% of rent collected in a professional, you’re spending a couple bucks to strengthen that safety net up front.

[ Learn More: NEXUS’ MODEL BEGINS ON MAIN STREET ]

[ Learn More: WHAT TYPE OF PROPERTY OWNER ARE YOU? ]

PERSONALITY 2: THE REAL ESTATE INVESTOR

If you’re a real estate investor, or think you will be, then your approach should be a bit different. Maybe you already have a handful of properties and you’re comfortably in the cycle of building equity and investing further. Maybe that’s your vision but the current market is slowing down the timeline of your vision. Regardless, if your goal is to buy more, dedicating money for a cash reserve is not in your best interest.

In short, all the money you get should be put toward the next downpayment on your next property. Those who build for retirement through a 401K are taking the comfortable route; those who actively invest cannot do so successfully if they don’t trade some of that comfort in and take some chances. The same principle applies here. If you want to aggressively build your real estate portfolio you’ll need to take profits and reinvest them when the opportunity arises. If you’re squirreling some of those profits away for when “acorns” are scarce, you’re missing the chance to buy another oak tree. It all comes down to your vision, your goals, and what motivates you. If your goal is to invest, you need to put your money toward growth, not comfort.

[ Learn More: IS REAL ESTATE INVESTING FOR YOU? ]

[ Learn More: TRUSTWORTHY PROPERTY MANAGERS HAVE ‘YOUR’ GOALS IN MIND ]

COMFORT IN A DIFFERENT FORM

It’s also important to point out: by investing and adding to what you already own, you’re taking steps to create comfort in a different way. We’d outlined (above) that a cash reserve creates that comfort should some costly repair crop up, but if you own 4 or 5 buildings, you’ll have money coming in from those properties that you can easily use to cover expenses at others when they should arise. By taking your stagnant reserve and using it to create more value, in the end, you’ll end up with a means to cover those unexpected concerns and a larger, stronger real estate portfolio.

[Learn More: WHAT TO DO RIGHT AFTER YOU PURCHASE AN INVESTMENT PROPERTY? ]

[ Learn More: THE SECRETS TO SUCCESS WHEN GETTING INTO REAL ESTATE INVESTMENT ]

IN SUMMARY:

All investments and so much of what you do should come down to your personal goals, your motivations, and the vision and trajectory that stems from those. You can read all the advice articles online and none of them are right for you if you can’t apply them to your specific situation and desires. Keeping a cash reserve is no different. If you’re not accustomed to debt and aren’t comfortable taking financial risks, have that cash reserve to help you feel confident about the investments you already have. If you’re looking to grow your assets and are actively looking to invest, it should make sense that keeping a cash reserve is taking from your ability to purchase your next property.

As always, reach out to our team if you have any questions or want to learn more. Our New England teams operate out of four offices in the region and Nexus offers franchise opportunities nationwide.

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Mick Lefort is the Vice President of Operations for Nexus Property Management®. A National Property Management Franchise that manages all types of rental property from single family homes or condos to large apartment buildings and complexes.

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