Peter Lohmann recommends keeping $3,000 to $6,000 per unit in capital reserves for unexpected repairs like water heaters, furnaces, and roofs. He also suggests an extra $500 per unit as an operating buffer. Lenders often require these reserves before approving loans.
So let's talk about reserves. So for every unit that you manage, from time to time you're going to have unexpected expenses. You know, you may have a water heater go out that has to be replaced, you may have a furnace that dies in the middle of winter, you may need to end up replacing the roof or the windows or the siding, things like that. So people refer to these as capital reserves or capital expenditures, CapEx for short. And lenders will often require that you set aside reserves or have a certain amount of money set aside in reserve to help cover these expenses when they come up. So one question we get a lot is, hey, how much should I actually be setting aside in reserves to make sure that I'm covered in the event of a large unexpected expense? So the short answer is, you know, the more the better. You're never going to have too much in reserve. We like to see that property owners are setting aside a healthy chunk of the revenue that comes in from the property and holding those in reserve for large expenses. On the personal investment properties that I own, we're generally setting aside anywhere from probably about $3,000 to $6,000 is sort of our target threshold for holding in reserve for capital expenses. And then when we do have a large capital expense item come up, we'll use those funds to help pay for that. And then those reserves will get slowly built up over time as the years go by. So the short answer is, you know, the more the better. More specifically, we like to see anywhere from $3,000 to $6,000 per unit. Held in reserve. Now, at our company, we'll hold a little bit of money in reserve per unit just to smooth out the operating income from the property. We're normally holding around $500 per unit in reserve, but we also like to see property owners holding a larger amount in reserve as well.
