If I increase rent do I also increase what I set aside?

Question

Quick and easy, hopefully.mortgage is 2700, rent was 3100. I raised rent to be 3250. Do I need to set aside 5% of the mortgage for CAPEX, Maintenance, Management, Vacancy or should I increase what I set aside based off of new rent income essentially increasing my reserves?

thx for the help!

Sergey A. Petrov · Answer

Set aside all of it regardless of the spread / cash flow. Once enough of a reserve is built up, keep it setting it aside for the downpayment on the next investment

Justin Moy · Answer

A big question is how long until your major expenses come due? Roof, water heater, HVAC, any other mechanical issues depending on the age of the home.

The great part if you're not living on the rental income is you can set aside quite a bit and even if you don't pocket the cash flow, someone else is buying you a house.

Personally, I'd increase the reserves by a small amount as long as you don't need that cash to survive.

David M. · Answer

@Nicholas Glatter

Hmmm... I'd just say get a little more "realistic" with your number...  In my opinion, any percentage is just a rule of thumb.  Especially for CAPEX and maintenance, you should have a more realistic number since you already own the property.  What are the age of the major items?  How much do you have on hand now?  Assuming they all don't fail at the same time, could you cover it?  How fast do you need to build up, etc...

Nathan Gesner · Answer

This is a negative cashflow property. A typical property will consume 5% - 10% every month for maintenance costs. Taxes and Insurance will eat up at least 10%. That's already taking all the money available after payment of the mortgage. There's nothing left for vacancy, turnover, capex, or property management.

A healthy cashflow requires the rent to be approximately double the mortgage. Subtract the mortgage, taxes, insurance, and set aside approximately 30% more as reserve for vacancies, maintenance, and capex. Then anything left over would be your cashflow.

Let's say a tenant fails to pay their last month's rent and moves out. They didn't clean and there are some minor damages to the property. It takes you three weeks and $1,000 to turn it around. That's $2,275 in lost rent plus $1,000 spent on cleaning and repairs. It will take six months of rent just to break even. If you have a tenant that stops paying rent and it takes you three months to get them out (not uncommon in California) plus they leave $4,000 in damages (not uncommon anywhere in the country), that would leave you with $13,750 in losses and it would take 25 months to recover!

You are in an appreciation market. If you have the opportunity, I would sell in this peak market and move the money to a state with property that cashflows and laws that treat Landlords justly. I also highly recommend you learn more about good investments. The only reason you're doing well now is you have the good fortune of buying in a market that appreciated heavily.

Here's a guide that describes what good cashflow looks like and how to analyze a property.https://www.biggerpockets.com/...

Bill B. · Answer

Nobody asked, maybe because they don’t care maybe because they don’t know it matters.

You forgot to say how old the property is and what kind of property it is. Imagine property a is a 100 year old SFR and property b is a 1 year old condo. If you own property a you should sell now. If you own property b you’ll be fine and shouldn’t need any reserves. Assuming you fall in the middle you’ll have to figure that out.

If you don’t need the cashflow this is probably a very profitable property. Your loan paydown is probably in excess of $12,000/year and tack on $250k in appreciation all tax free. This would take a dozen properties in the Midwest. And then you’d own a bunch of property b’s.

If you aren’t using a PM I’d talk to one and ask how much rent they would charge and how much they would charge you to do that. You might find you are so far under market rent they could pay for themselves. Rents have gone insane the last 2 years. You’re suggesting a 5% rent increase. Either you were at the tip top of the market before or you’re under market now. 10-20% is much more common.

Curtis Mears · Answer

@Nicholas Glatter

I keep a specific amount in checking account every month.  Anything over gets paid out (usually to my wife).

Account Closed · Answer

@Juan Martinez

Still the % mortgage to rent is very scary imo

Account Closed · Answer

@Nicholas Glatter

83% of rent going to mortgage seems insane! I have no idea how the average person could scale in CA with the numbers you've shared. Personally I'd sell the property and use that income $250,000 gain (plus whatever you paid originally) to invest in many doors in a different market. Appreciation is great...but you can't spend it.

Here in the Midwest you can get $500 after PITI on $1,000 rent (and properties well under $100K)

Anyway, just my opinion. Best of luck!

Account Closed · Answer

@Nicholas Glatter

With those numbers, honestly I would set it all aside. My guess is if you hold this property for a few years, you'll find it's negatively cashflowing over the long-term. Only $550 after that hefty of a mortgage is pretty scary imo...but maybe others can chime in as I'm in a Midwest market.

Can you refi to get your payment down? I'm assuming it's PITI and not just PI? Can you I crease rent more than $3,250?

Dawn Melin · Answer

@Nicholas Glatter   We use a straight % when evaluating a property for RnM and CapX, but set aside as much as possible when we purchase properties.

If I increase rent do I also increase what I set aside?

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