Hurricane Irma: The Importance of Reserves

I live in southeastern Georgia on the coast and we were certainly impacted by Hurricane Irma. This included a mandatory evacuation, temporary work closure, and scrambling for portable food and available hotel rooms. During the week-long ordeal, the constant barrage of images of torrential rain, flooding and downed trees created a sense of gloom of what I would find upon finally returning home. Likewise, I had similar concerns for the tenants and properties of my rental portfolio in Jacksonville Florida – further southward and therefore more exposed to the effects of the hurricane.

I feel very fortunate to report that, relatively speaking, we came out of this ordeal with manageable damage both to my own home and my rentals. I define manageable as no significant flooding, no direct hits from trees, and no need to file insurance claims. Nonetheless, the following communication from my TurnKey provider/ property manager attests to the fact that I will be facing some unusual financial challenges over the next couple of months and prompted me to write this blog.

When we screen our tenants we are very strict on verifying that their monthly income is three times the rent. With an average rental rate of approximately $1,000, this translates to a minimum requirement of $36,000 gross annually. In most cases, our tenant’s household income is in line with the national median household rate of approximately $57,000. Their jobs include bus drivers, dietician, and retirees working part-time. Good salt of the earth people, but also not the profile of someone easily able to withstand a significant short-term cash flow crunch.
When you factor in that many of the tenants have missed 5 days of work or more, and have extra hotel and food expenses, it can quickly exhaust their savings.

So not only am I faced with the dilemma of half of the tenants or more having payment issues over the next 2 months, but I also have elevated expenses related to tree pick up, and minor structural damages. Combining this with my debt service and this is likely to be the first time in over 3 years of ownership that I will have to feed my portfolio as opposed to receiving its usual cash flow. Given the relatively measured pace of my property acquisition and prudent use of leverage; it is a position I never thought that I would be in.

This underscores the often repeated mantra that I have read on this site and heard on the podcast: If you’re going to be in the landlord business and survive long term, you need to have adequate cash reserves. Roofs wear out, HVAC die, pipes burst, and yes…hurricanes happen.

The exact amount of reserves is a matter of debate as I have heard amounts advocated ranging from as little as $500 up to $10,000 per property. Personally, I allocate $1,000 per property which has always been more than sufficient in the past but will be tested during this whole ordeal. Obviously, I am hopeful that the disaster relief rent program will eventually help, but I certainly can’t count on it happening in a timely manner if at all.

How much in reserves do you set aside?

Has anyone had their rental portfolio affected by Irma or other natural disasters in a significant way?

Hear my story on Bigger Pockets podcast episode 219

Please note: I reserve the right to delete comments that are offensive or off-topic.

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