"I've been doing around 5% of monthly rental income, but lately I'm thinking maybe that's not enough..."
Honestly, 5% feels tight to me too. I bumped mine up closer to 8-10% after a tenant's "small" kitchen fire turned into a full remodel. Curious if others adjusted theirs after similar experiences...
Yeah, 5% always felt a bit thin to me too. I used to set aside around that much until a tenant's "minor plumbing issue" turned into replacing half the bathroom floor...fun times. After that, I bumped mine closer to 10%. It stings a bit each month, but honestly, sleeping better at night is worth it. Better safe than sorry, right?
I've been debating this myself lately. I was sticking to around 5%, thinking it'd cover most surprises...until a roof leak had me scrambling to find extra cash. Maybe bumping it up a bit isn't such a bad idea?
I'm with you on this one—5% sounds good on paper, but reality has a way of throwing curveballs. A few thoughts from my own experience refinancing recently:
- 5% is a decent baseline, but older homes or properties in areas prone to weather issues might need closer to 8-10%. Learned this the hard way when my HVAC system decided to retire early...
- Also, consider the age of major appliances and systems. If your roof or furnace is nearing the end of its lifespan, bumping up your reserves makes sense.
- Another thing: lenders sometimes look favorably on higher reserves when qualifying for DSCR loans. It can smooth out the approval process and even help with better terms.
- Lastly, don't forget about vacancy rates if you're renting out. A month or two without tenants can quickly eat into your emergency fund.
Bottom line, a little extra cushion never hurts, especially when dealing with property ownership.
Good points here, especially about vacancy rates. People tend to underestimate how quickly a month or two without tenants can drain reserves. Seen it happen more times than I care to count.
One thing I'd add is that lenders don't just look at reserves—they're also paying close attention to your property's cash flow and how comfortably it covers the debt. Even if you have healthy reserves, if your DSCR is borderline, lenders might get nervous. Aiming for a DSCR of 1.25 or higher usually keeps things smooth, but I've seen deals squeak through lower if the borrower has significant reserves in place.
Also, keep an eye on local rental market trends. If rents are trending downwards in your area, lenders might be more conservative in their underwriting. Had a client recently whose appraisal came back lower than expected because local rents had dipped slightly from last year's highs—caught them totally off guard.
And speaking of appraisals... always build some cushion into your expectations there too. Appraisers can be unpredictable, and if the valuation comes in lower than anticipated, you might have to bring extra cash to closing or renegotiate terms.
Bottom line: having that extra cushion is key—not just for emergencies but also because it gives you flexibility when things don't go exactly as planned (and trust me, they rarely do).
