The Book on Rental Property Investing

The amount of cash you should have in reserves depends on a number of factors, most notably the number of properties you own, the condition/age of those properties, the anticipated cost of fixing the properties (would you do the work yourself?), saving for larger future big-ticket expenses, and your management abilities. However, I would encourage you to start with

six months of expenses for each unit you have.

A good friend of mine advises investors that “your business should bring in at least 3X of your current job before thinking of quitting your job. 1X for tax, 1X to survive, and 1X for reinvestment and unexpected events.” I think his advice isn’t too far off.

The more “math-minded” investors out there can get a lot more technical by looking at return on investment and the amount of cash invested. For example, let’s say that you only buy rental

properties that produce a 10% return on investment for your money; we’ll also assume you want to “retire” with $100,000 per year in passive cash flow from your rental properties. You would then use these two figures to determine how much cash you’d need to invest. To do this, use the following simple formula:   Annual Cash Flow / Interest Rate = Cash Invested $100,000                /           .1         = Cash Invested $100,000                /           .1         = $1,000,000

For example, a popular rule of thumb used by many house flippers is the 70% rule. This rule states that the most a flipper should pay for a property is 70% of the after repair value (ARV, what the house is worth after it has been fixed up) less rehab costs. So, a house that has an ARV of $150,000 and needs $30,000 worth of rehab could be bought for $75,000, because $150,000 x .7 = $105,000 $105,000 - $30,000 = $75,000

Megan C, an investor from Texas, recently told me she always asks potential contractors for three referrals from the most recent jobs they’ve completed and then calls those references to ask “if they showed up on time or when they said they would, did they complete the work, did they

try to change the $$ amount mid-work or after it was done, and would you use them again.”

J’s suggestion was this: Go to Home Depot at 6:00 a.m. and meet the contractors who are there.

Expenses are deceptive.

Now what if you are going to manage yourself? You must still budget for management. Here’s why: if you are successful (and you will be!), you cannot manage forever. There will come a day when you will have too many properties, and you’ll need to start using property management. What happens if you never budgeted for it? That’s right: you lose all your cash flow. So whether you plan to manage yourself or not, budget for a property manager.