Reserve Mistakes: Expectations vs Reality

The Landlord's Almanac - Landlord Conversations

Reserves, Savings, Cash Flow, NOI……so many buzz words that landlords don’t know what reserves really are and how not understanding it can get you into a large number of financial troubles.

Recorded:
March 26, 2020
Host:
Kassandra Taggart
Patrick Dailey
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Show notes:

Landlords! Today we will have an in-depth conversation about reserves. Reserves is one of those things that aren’t interesting and easily forgotten. However, it is vital and one part to a financial picture of Residential or Commercial property. It has also become a “buzz word” and is not being confused with cash flow or maintenance expenditures thus getting many landlords into trouble.

Patrick has been a property manager for almost 2 decades for Residential and Commercial Property Management and he is also an investor. Patrick works with investors day in and day out and has the ability to understand the fears, accomplishments, and goal and to bring it into a clear action plan that’s do-able. He is one of the most patient person I know, which is what’s required in management.

Question: Everyone seems to have different definitions of Reserves. What Is your definition of reserves and what is it for and what are the different types of property reserves systems?

Patrick gives a definition of reserves.

Patrick provides information about how it can create a cushion for challenging times.

If you don’t have a reserve, start making one ASAP.

You can use bank setup like operating, trusts, and savings to separate the fund to avoid spending the reserves.

Being organized and creating separation is needed for being organized and avoid the commingling of funds.

Question- How does reserves vs personal savings differ? Why do you need each?

Savings and reserves operate as the same, set aside money. The difference is the purpose and how it is calculated and spent.

Generally, savings is personal, like saving for your next purchase.

Reserves funds for investors is savings for operations of the building.

Properly planning the funds will make taxes easier.

Property reserves can be calculated by looking at large expenses and determining how much and when to save for those items.

Question. What forms might a reserves system take?

The two main systems that I've seen used are planned and unplanned expense reserves.

Or do you truly wish for the account to operate as a rainy day fund, helping you when you need it most?

The best investors I've ever worked with have had both, two accounts for both scenarios.

Question. What are

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