Rental Home Investors Need A Cash Reserve
You make a budget and invest your money in a rental house. How much should you have as a reserve?
Property Taxes and insurance are set amounts that occur once each year. Easy to plan for.
The average cost for maintenance and repair for most rental houses in Metro Atlanta is about $2600 per year. That’s about $215 per month. There are significant variances based on the age and quality of the houses.
When tenants move out it usually costs the owner about one month’s rent in vacancy losses. How long do tenants stay? In the apartment industry the average is around 19 months. With single-family rental houses, the industry average is about 2.5 years (our average is a little over 4 years). So if you estimate you will have tenants move out every 3 years then that is about 3% of gross income lost due to vacancy.
But after you budgeted for $215 per month in maintenance, it didn’t happen in $215 monthly increments. It happened as the water heater burst (usually at night or on the weekend), when the air conditioner stopped working (usually when you are out of town), or other items that cost much more than $215. Remember, the $215 was a monthly AVERAGE, not the monthly amount.
Then there are turnkeys. Your tenant moves out and you need to 1) make the place rent ready again (paint, clean, steam clean, misc. repairs) 2) get it re-rented (which also costs time and money) and 3) do all this while no rent is coming in.
We recommend you do 2 things to make your rental home experience more rewarding:
First, establish a cash reserve of at least $5,000. Add another $2,500 for each additional house you own. If you do not have that available now, start working on it.
Second, set up a separate bank account for your rental properties. The rents go in it, the mortgage payments and expenses come out of it, and the positive cash flows accumulate to help fund your reserve. You can also choose to add money to this account each month like you would for your IRA or 401k. As the amount accumulates you have a down payment for another house. But the primary benefit of keeping these funds separate is so that your household bank account is not hit, unexpectedly, with big-ticket expenses from your rental property. We would hate to see an investor have to cancel the family vacation because the furnace dies right before the Holidays and had to be replaced.
Rental houses are a great way to build your net worth and enhance your retirement. But these unexpected expenses turn some people off from the benefits rental houses provide. Plan ahead, fund your reserve, then you can sleep well now and retire well later.
Excalibur Homes is more than a property management company. We’re an investment real estate firm dedicated to helping our clients buy, sell, lease, and manage single-family rental houses throughout all of Metro Atlanta. Click here to learn more about Excalibur Homes.