There’s no magic formula you can use to determine how much you should keep in reserve in your business as a real estate investor. When you rent properties, the four key factors to consider are the strength of the local rental market, eviction time line and cost, the age of the property, and the type of neighborhood.
Strength of the Local Rental Market
The lower the vacancy rates in your area, the fewer reserves you’ll need for vacancies. Your local newspaper or your city’s housing department may have articles or statistics on vacancy rates. You should, at a minimum, have enough cash reserves to pay for one month of vacancy per unit, which is only an 8 percent vacancy rate.
Even in a good market, you’ll deal with problem tenants who may stop paying rent and require an eviction. Good tenant screening will help solve this problem. If you plan to rent properties, you should always, without exception, do a rigorous background check on tenants. This includes reviewing credit reports, employment verification, references, and calling current and previous landlords.