Contrary to popular belief, there is really no magic formula that can be used to calculate how much money should be kept in reserve for your business if you are a real estate investor. In essence, there are four major factors that need to be considered when you rent properties. They are:
The Strength and Stability of the Rental Market in the Local Area
As a general rule of thumb, the lower the vacancy rates in the local area you operate in, the smaller the reserve you will require. However, it is important to have at least enough cash in your business reserve to pay for one month of vacancy.
The reason why it is advised to keep one month of vacancy cash is because if the tenants stop paying their rent, you should at least have enough money to work on. Remember, to avoid rent problems, make sure that you select good tenants through credit checks, references and etc.
The Cost and Time Line for Eviction
You see, the length of time that is will take you to evict a tenant from your property is comparative to your businesses cash reserves. The reason behind this is that if the tenant refuses to move for any reason, there will be legal proceedings that will take up a lot of time and money, your money. Keep some extra cash reserves just in case the length of the eviction time line is long.
The Age of the Rented Property
The age of the property must be inspected carefully and then a cash reserve amount created accordingly. If the property is new or has been recently renovated, then you do not need to worry that much about repairs or problems within the first few years of providing the house on rent.
However, it the house is old, problems can be created so it is wise to keep some extra money stored away for repairs and various other problems.
The Type of Neighbourhood the House Is Located In
In the event that you are renting houses or apartments in low-income areas, then you should expect the turnover to be considerably higher than that of high income areas. If this is the case, then a large cash reserve should be kept to cover any costs of eviction, repairs or un-rented property.
These four factors all count together to determine the amount of cash a real estate investor should keep in their cash reserve. For more information about the cash reserve of a real estate investor, please visit www.eroinvestments.com.