If there is one thing that separates a stable multifamily deal from a ticking time bomb, it is reserves.
Yet, they are often the least talked-about component during underwriting.
Operating Reserves: Your First Line of Defense
A strong reserve strategy starts with protecting your operating runway. How much should one reserve? Ideally:
- Either 8-12 months of operating expenses, or
- 4-6 months of operating expenses plus 4-6 months of debt service.
This cushion is critical in times of vacancy spikes, unexpected repairs, or slower than expected lease ups. It buys time and peace of mind – two things every operator needs.
CapEx Reserves: Underestimate at Your Own Risk
When it comes to capital expenditures, rough capex assumptions kill deals. That is why you should never guess – validate with a contractor and a property manager. Once you have scoped the project, always add a 10–15% contingency buffer (might consider a higher cushion in today’s tariff environment). Construction costs rarely go down, and surprises/change orders are the rule, not the exception.
One Size Does Not Fit All
The exact reserve amount depends on:
- Property condition (older assets = higher reserves)
- Risk tolerance (If you’re a conservative investor, build the cushion larger)
Underwriting without proper reserves is like flying without insurance – you might not crash today, but if you do, it will hurt a lot more than it needs to.
A push back I often get is that the higher the reserves, the lower return. However, I beg to disagree. Having a rainy day fund reduces the overall risk profile of the deal. Thus, while a low or no reserve can enhance the return profile, it exponentially increases the risk and the probability of a capital call down the road.
Bottom Line
Smart investors do not just plan for the upside. They reserve for the downside – and that is what keeps their portfolio alive through every cycle.