How Much Cash Do You Need to Keep in Reserve?

As soon as you start turning a profit, which may take months or years, think about setting some of it aside for a rainy day. Note that we are assuming you are already setting aside enough to cover irregular expenses like property taxes and insurance. It is simply bad business practice to spend everything in your business account and leave nothing to fall back on. That means resisting the temptation to either churn your profits back into property improvements or make them your weekend play fund.

Instead, take a portion of your business profits and transfer them to an interest-earning savings account. This is comparable to the "emergency fund" that financial advisers suggest you keep for your family, with three to six months of living expenses, just in case of a job loss or another emergency.

How much should you keep in your reserve fund? As with your main property, it is best to set aside enough to pay for unexpected events such as a leak in the roof or flooding in the basement. Experts recommend saving the equivalent of 5% of a home's purchase price (or current value) each year to cover maintenance and repairs. Also, keep enough to pay the mortgage and other monthly costs if the tenant unexpectedly moves out. This should cover as many months as are appropriate given the local average vacancy rate.