Topic 07 · 5 min read
Risk, Reserves, and Staying Solvent
The owners who last are the ones who planned to be wrong.
Property risk is not exotic. Tenants leave, repairs arrive, insurance and taxes rise, and markets soften. None of these ruin an owner who has cash set aside and a payment they can cover for a few empty months. All of them ruin an owner running on the last dollar.
What to know
- Keep a reserve, always
- Three to six months of full costs per property is a common target, held in cash rather than in a plan.
- Insurance is the cheap protection
- Landlord coverage plus liability, sized to rebuild rather than to the purchase price.
- Diversify slowly
- One property in one city means one local economy decides your outcome. Adding properties quickly on thin margins doubles the fragility instead.
- Know your exit before you enter
- Sell, refinance, or hold long term — deciding in advance keeps a bad quarter from forcing the choice for you.
The tax benefit
A loss year is not always a tax loss, and a tax loss is not always usable right away — which is exactly why cash reserves, not deductions, are what carry an owner through.
Worked example
Two empty months
A duplex costing $1,400 a month to hold sits empty for two months and needs a $2,000 furnace. The owner with $6,000 set aside shrugs; the owner with $500 borrows at 24 percent.
Watch out for
- Insurance that pays the market value may not pay to rebuild.
- Property taxes often jump the year after you buy.
- Borrowing the reserve is the same as not having one.
Terms from this topic
ReservesLiability coverageDiversificationExit strategy
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