Real Estate Investing Basics

How Much Should You Budget for Reserves and CapEx?

15 Articles Written
Upset household calling roof repair service while water leaking from ceiling

You may or may not have experienced this firsthand, but I am certain you have all heard the horror stories from buy and hold investors. You have a rental property that is cash flowing wonderfully, and then all of a sudden the HVAC stops working. It’s going to cost $4,500 to get it back to working order.

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Oh, no!

In this article, we are going to go over what exactly reserves and CapEx are and how much you might want to have set aside for these scenarios.

What Are Reserves and CapEx in Real Estate Investing?


Reserves are just savings that you have set aside for the day when your property goes vacant. It really isn’t a matter of if it is going to be vacant, it is a matter of when. Every tenant will eventually move out (or get evicted).

In this situation, it is very wise to have money set aside to pay for the mortgage (if any), insurance, and taxes that accumulate on the house. You will also need to factor in electricity, water, trash, and any other utilities your property may have that you need to keep the place functional until your next tenant moves in and takes over.


Short for capital expenditures, CapEx refers to large items in the household that need to be replaced over time. Think things like water heaters, roofs, and HVAC systems. Typically these aren't things that need to be replaced every year, but every five to 10.

Related: How to Estimate Future CapEx Expenses on a Rental Property

How Much Should You Set Aside for Reserves and CapEx?

It is pretty typical for banks to require six months of reserves in a savings account when they loan on a house. So, if you are going through a traditional lender, you might need to consider this.

businesswoman doing paperwork at office desk, working through finances, using calculator and making notes in her notebook with pen

The Math


To calculate this number, take your mortgage with interest, add in your taxes and insurance, and multiply by six. Boom! There's the amount of reserves that you should have set aside.


As for CapEx, this will vary on a case-by-case basis. You will have to ask yourself:

  • Has the roof been replaced recently?
  • When was the HVAC updated?
  • Have I replaced plumbing?

Basically, what condition is the house in when you begin to rent it out? This will determine how much you want to have set aside.

Related: Protect Your Real Estate Investments & Finances with Strategic Reserves

How Do I Save for This?

It is a great idea to factor these expenses into your monthly cash flow analysis. When doing it this way, it makes saving up for these expenses more manageable, because you break it down month by month. The funds come out of the rent you’re collecting.

For even more on this, check out my article about all of the things that I factor into a cash flow analysis called “How Do I Know If a Property Is a Good Investment? (With a Buy & Hold Example!).” It goes into a lot more detail about cash flow analysis that isn’t covered in this article.

Don’t think of these items as cutting into your bottom line. Think of putting aside this money as protecting your investment when things go wrong and need to be taken care of.

Everyone is going to approach this differently, and there are really no hard and fast rules to help you determine the right amount to save. You just need to do what makes you comfortable and helps you sleep at night—instead of worrying about the possibility of something going wrong in your investment property.

Do you have money set aside for unexpected property expenses? How much? How did you arrive at this number? If you don’t, what’s your plan in the event of unforeseen circumstances? 

Leave a comment below.

Nathaniel is an active real estate investor and entrepreneur. He served in the Marines from 2003 to 2007 and got his bachelor's in Mechanical Engineering from Cal State Long Beach in 2016. It was s...
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    Terry Lowe
    Replied 10 months ago
    So true! This is why I don’t understand the BRRR method of acquiring Real estate. If you are only making $100-$200 a month how are you going to be able to replace big items. Just this week we have had a garage door opener go out and a hot water heater. The hot water heater is in a duplex where both hot water heaters were installed 16 years ago, at the same time. So, I am expecting the other one to go out sooner than later. If I was only making a little profit, I’d be in trouble! My profit margin is big enough to absorb this, and I save for repairs as well. I don’t like repairs, but it’s not a financial crisis either. Terry
    William Cain Investor from Huntersville, NC
    Replied 10 months ago
    What percentage of rents are you setting aside for repairs, CapX, and vacancy?
    Nathaniel Hovsepian Rental Property Investor from North Augusta, SC
    Replied 10 months ago
    Oh my gosh, I don't know how I missed putting a percentage in there. I apparently was so focused on what I keep ahead of time that I didn't focus on the portion of rent. Here is another article that goes wayyyy more into detail about percentages for every aspect of rent.
    Nicholas Lohr Investor from San Francisco, CA
    Replied 10 months ago
    @Terry Lowe How come you are equating BRRRR with 100-200 per month? Just because you may have heard 100-200 mentioned does not mean that its synonymous with the BRRRR method. I have only ever done BRRRR deals and my cash flow averages 400-500 per unit and that's AFTER taking into account the couple hundred for CapEx and Expenses that I most of the time don't even use because these are recently renovated BRRRR'ed properties.
    Terry Lowe
    Replied 10 months ago
    That is good. We started a long time ago, and kept our day jobs. We used the profits to renovate, pay down mortgages, and buy new units. We never felt like we were building a house of cards. S___ happens, and we always wanted to feel like we could handle it. Now we are retired, and live very nicely off the rents and our SS. All of our rentals are paid off, and someday our kids will benefit as well. We feel secure and happy!
    Michael P. Lindekugel Real Estate Broker from Seattle, WA
    Replied 10 months ago
    For commercial properties including apartment buildings with five or more units it is a little more complicated, but along the very same lines. Reserves are more than savings for a vacancy. Reserves cover unexpected costs plus reserves are used to pay for capital expenditures. For commercial property, the bank will require the buyer to provide a budget for capital expenditures to build the budgeted reserve amount. Typically, the budget is derived from the Property Condition Assessment report. The PCA report is the (fancy more expensive version of an inspection for 2-4 units) inspection performed to ASTM standards typically performed by a licensed professional engineer or PE. The PCA will include an assessment of major components including the remaining useful life. The cost of replacement is added to a schedule in the PCA for the component. The Future Value of the replacement cost is based on inflation. When the component needs to be replaced at the future time you have an estimate of the future replacement cost. The future replacement cost can be discounted at the buyer’s savings interest rate to determine the amount of reserves that need to be saved each year to accumulate the cash to replace the component at the future date. A buyer should incorporate all of this into the financial due diligence when preparing pro forma financial statements and discounted cash flow analysis to calculate the estimated ROI. The bank certainly will do that level of analysis for reserves and capital expenditures for underwriting the loan to ensure the cash flow is sufficient to cover reserves. The buyer should do it as well so there are no surprises. All of this may sound really complicated. It can be scaled down using Excel and the pre-defined functions for smaller properties as well. For smaller rental properties a licensed inspector should provide an estimate of the remaining useful life for major components such as HVAC, roof, siding, electrical, plumbing.
    Nathaniel Hovsepian Rental Property Investor from North Augusta, SC
    Replied 10 months ago
    Michael thank you so much for the valuable input. Maybe the title of this should have been how much should you budget for single family residences. Lol. Also, I didn't know that you can ask your inspector for an estimate on how long major components might last.
    Michael P. Lindekugel Real Estate Broker from Seattle, WA
    Replied 10 months ago
    sure you can. what kind of roof is it? a twenty year roof. how old is the roof? 5 years. the inspector observes owner didnt take care of it. it probably has ten years left not 15 years. when was the furnace installed 2000. the furnace is 19 years old. they typically last about 30 years with maintenance. you have 11 years left. although, i have seen 30 year furnaces continue to perform for 40 years or more. they are not as efficient. yes, all my non PE residential inspectors are able to provide that kind of input.
    Dave Rav from Summerville, SC
    Replied 10 months ago
    I would venture to say the a number of small REIs don't save 6 most reserves for CapEx and vacancy. Now, I'm talking 1-unit SFRs. As someone else mentioned, it's extremely hard to do with CF on one unit. It's easier if (+) CF is, say $400/mo. And don't forget, if you have a decent home warranty, that helps with CapEx
    Joseph M. Rental Property Investor from Sacramento Area, CA
    Replied 10 months ago
    I always calculate 5% of gross rents for general maintenance and 5% of gross rents for CapEx. Both go into the same "bucket" of funds. After all of my calculations are finished, I will not do a deal unless I am getting over $450/mo in before tax cash flow (for an SFR) or $300/mo/door (for a multi). And that is assuming all my other conditions fall in line (ex. CoC ROI, solid rental area...). To stay in business for the long haul, you have to position yourself for the long haul.
    Wenda Kennedy JD from Nikiski, Alaska
    Replied 10 months ago
    This is also a continuing process for HOAs and PUDs. Many boards don't keep the reserves on hand in a sinking funds for short-lived items and unexpected repairs. I make the same calculations informally for my mobile home park. We had a major leak in our small community water system over the weekend. The pump couldn't keep up. After locating the leak, we had to move a mobile home, dig 10' feet down to find the leak and fix it as an Alaska blizzard started rolling through. Our rule of thumb is that the worst thing is going to happen under the mos dire weather or set of consequences. We try to fix problems before they happen to prevent those moments. Having the money sitting in an account ready is like having a warm blanket on a cold night. When you need it -- you REALLY need it.
    Terry Lowe
    Replied 10 months ago
    It is really hard for HOA’s to keep enough reserves when there is a 5% cap on dues increases. All of our 5% goes to insurance. It keeps us between a rock and a hard place!
    Kevin Polite Flipper/Rehabber from Decatur Atlanta, GA
    Replied 10 months ago
    I've do have a Capex Fund, though most of our of vendors for large capital expenditures accept credit cards. I use our company Delta Amex card as much as possible for the points, but keep the balance as close to $0 as possible. If it's a big item I budget so I pay it off in 12 months or less or use money from a flip to pay if off. Plus the company cards don't show up on my credit report. I take advantage when they have those 0% 12 months financing, though that doesn't happen as often anymore. If you're making $100/month this may be an option until you build up more reserves, though at that amount it'll be difficult unless you have many doors feeding it.
    Chad McCloskey Real Estate Consultant from Nashville, TN
    Replied 10 months ago
    These concerns are actually my area of specialty and I have worked with over 1000 cases in the last 4 years for clients that have ranged from one unit owners to municipalities worried about the same problems. While there is a range of values any particular person could be comfortable with setting aside (as a percentage of expected costs), it's best to actually itemize your exposure and keep a record of current costs for jobs in your market handy so you can continue to be acutely aware of the reality of your liabilities. Besides the obvious major repairs like roof, HVAC, water heaters, etc, you also need to keep in mind painting projects (much cheaper to maintain good paint vs replace siding or metal surfaces due to neglect!) and possibly driveway maintenance or even the regular trip n fall repairs to walkways etc. While you could absolutely just try to apply a % of rents to this "funding" it's much more appropriate to have a solid idea of your long term itemized list of liabilities as I've seen this bite owners and investors in major ways many times.
    Nathaniel Hovsepian Rental Property Investor from North Augusta, SC
    Replied 10 months ago
    What a great response Chad. Thank you so much for your input here and your expertise.