When buying an investment property, every investor will have capital for a down payment. But how many have a reserve fun in place to mitigate the risk of unexpected damages, upgrade, or vacancies?
The issue of reserve funds become greater applying them to the scope of multi-family investing. You aren't just fixing one kitchen, but potentially all of them!
This is exactly why we want to tackle this question that was asked to our experts:
When buying a multi-family property, should I have a reserve and if so, how much?
You absolutely need a reserve fund.
But first, when you purchase the property, you want to have a professional building inspector who specializes in multi-family properties carefully assess the current physical condition of the property, focusing on all the main building components, such as the roof, mechanical, electrical, plumbing, structural, etc., upfront.
You want the inspector to tell you what the remaining economic life (REL) for each of those components are so that you can plan accordingly.
If the REL is less than 5 years, then it's likely a priority that needs to be addressed. In my case, once I identify these priorities, I like to address them in the first year of ownership and then move on to the next deal.
If items are significant, I try to negotiate the price down and if that does not work, I raise sufficient funds to address them. – Pierre-Paul Turgeon
That depends highly on the quality of the asset and the leverage.
A pristine asset with recently upgraded units, a new roof, new windows and a new boiler, with a 60% loan-to-value mortgage at 2.7% may need no reserve at all, just some cash kept from cash-flow.
However, an old, ugly property with a 30-year-old roof and smelly carpets and bathroom, with an 80% loan-to-value mortgage at 6% may need $15,000 per unit in reserve, plus known structural components such as: roof ($40,000), boiler ($20,000) or hallway carpets ($20,000).
And don’t forget about the $250,000 for new plumbing if the building is 80+ years old... – Thomas Beyer
This depends on the overall condition of the building and what renovations are being done.
As a general rule of thumb, I like to have at least two months rent or three months operation costs in addition to planned renovation costs. – Brian Pulis
In summation, the question of "whether or not" is simply YES.
However, the question of "how much" is a question specific to the property.
The general concensus by the experts is to answer that question based on how well your property performs during inspection.
If you know that you will need a hefty reserve to make a building profitable, and you can't get that money, then maybe it's not the greatest investment.
For more expert insights into real estate investing, download your FREE issue of the REIN E-Report!