I've had several conversations this week by phone, in person and by email with people wanting to jump into the real estate investing arena here in Kansas City. And all have come to me with very little thought about what kind of reserves they will need for their would-be rental property. That's why I'm here.
I don't blame these people for being ready to go. Heck, when you do the math, all of the math, real estate shines. But you simply cannot forget that real estate is VERY ILLIQUID (no way illiquid is a word!) and you'll have to ride out any rough patches you encounter with your cash on hand.
For instance, what if you have a great tenant for 10 months and all of the sudden she loses her job. This is happening right now to one of my investors. He has given her a month to get back on her feet and now we are going to move forward. So he's already lost one month and we're gonna lose another for getting the papers filed and another for getting the eviction done and another for getting rent-ready and finding a tenant. That's four months, five on the outside, of no income. Take a $795/mo rental property that is kicking off about $75/mo and you have expended $3,600 of reserves right away. Then if it takes $1,500 to get the place painted and ready to go for the next tenant, well...
You must have a healthy reserve chest going into any investment. Remember, investment money is not money you need to buy groceries. I would even say it's not even all the money you need for a small, modest vacation each year. It's money you want to and need to set aside for your future. Keep your reserve funds in a money market account or an interest bearing checking account. I have one that pays 5.25% a month. That's not a rental property return rate. But it let's me sleep at night. :)
