Hi everyone! Rookie here! I am practicing analyzing deals and I am getting different opinions regarding how much to allot for repairs. Per the Bigger Pockets Analyzing rental properties calculator video, it is best to allot 10 percent of the property’s monthly income. That seems like a conservative number and I would like to know how much people generally save and maybe other factors I may not be considering. I am planning on purchasing a b class duplex or triplex in a b class neighborhood in order to super house hack this year in either North Carolina, South Florida or Idaho. Thanks!
This is not an exact science. It depends on your financial strength, the quality of the property, how many properties you own, etc.
I like to start with one major expense and three months of vacancy. Imagine if you had one single-family home. The tenant fails to pay their last month's rent and leaves the place needing new flooring and paint. It will take two months to turn it around and get it rented. That's three months of mortgage and utilities, the cost of flooring, and the cost of painting. That's a pretty common scenario and could cost you $10,000 - $15,000 so that would be a good starting point for your reserve.
But there's more!
What if you're a cardiologist with no debt and making $250,000 a year? You could probably afford $20,000 without much impact on your personal budget. If you're a single mom with student loans, a car payment, and living paycheck-to-paycheck, then $20,000 would be devastating and a reserve is critical.
What if you have an apartment complex with 20 units? Do you save three months of vacancy for each unit and $50,000 for the roof replacement? That would be around $90,000 sitting in a savings account! At this point, I would recommend having a line of credit to cover these things so you don't have money sitting in the bank doing nothing when it could be put to work.
I have 33 units, no debt except for mortgages, and excellent income. I can pay for all my problems using the cashflow from my current rentals. I also have a $175,000 line of credit at the ready if something catastrophic happened. A reserve is unnecessary, but I still keep around $15,000 - $20,000 in my account.
The point is, you should sit down and assess your personal finances to determine what the worst-case scenario may look like, how much you would need to cover it without impacting your life, and whether you will need to build a reserve.
New to Real Estate · Tyler, TX · Member since 2019 · 41 posts · 30 votes
3y
Hi Andrea!
The calculator does suggest 10% but that is for cap ex usually and it is just a general guideline. 5% for every day repairs. If you plan on doing some serious remodeling in the beginning, you can effectively drop that number to 3% because everything is so new.
Rental Property Investor · Somewhere over the Rainbow · Member since 2021 · 1k+ posts · 1k+ votes
3y
This is somewhat subjective - depends on the age of the property, the rehab you completed, the size of the property and the property class at minimum
I find 10% for repairs and maintenance is a good conservative estimate to use because it generally budgets for more than what real life repairs/maintenance will cost you. There are other ways to do it ($/sq ft, flat monthly amount) but the percentage is quick and I find it generally works well, even for properties in class C areas. I think 10% is a good number to use long term too - once you've saved 4-6 months of expenses start putting the overflow somewhere else
If you're in a class B property, 5% would probably be pretty realistic to what you'd see in real life
This is not an exact science. It depends on your financial strength, the quality of the property, how many properties you own, etc.
I like to start with one major expense and three months of vacancy. Imagine if you had one single-family home. The tenant fails to pay their last month's rent and leaves the place needing new flooring and paint. It will take two months to turn it around and get it rented. That's three months of mortgage and utilities, the cost of flooring, and the cost of painting. That's a pretty common scenario and could cost you $10,000 - $15,000 so that would be a good starting point for your reserve.
But there's more!
What if you're a cardiologist with no debt and making $250,000 a year? You could probably afford $20,000 without much impact on your personal budget. If you're a single mom with student loans, a car payment, and living paycheck-to-paycheck, then $20,000 would be devastating and a reserve is critical.
What if you have an apartment complex with 20 units? Do you save three months of vacancy for each unit and $50,000 for the roof replacement? That would be around $90,000 sitting in a savings account! At this point, I would recommend having a line of credit to cover these things so you don't have money sitting in the bank doing nothing when it could be put to work.
I have 33 units, no debt except for mortgages, and excellent income. I can pay for all my problems using the cashflow from my current rentals. I also have a $175,000 line of credit at the ready if something catastrophic happened. A reserve is unnecessary, but I still keep around $15,000 - $20,000 in my account.
The point is, you should sit down and assess your personal finances to determine what the worst-case scenario may look like, how much you would need to cover it without impacting your life, and whether you will need to build a reserve.
Real Estate Broker · Hyde Park Tampa, FL · Member since 2019 · 2k+ posts · 3k+ votes
3y
You can plug in any number you wish but when analzying a real deal, you'll want to actually KNOW what your estimated repair expense will be for at least the first few years. This allows investors to make a more accurate offer for a property based on market and condition, plan for repairs/improvements, and to better utilize cash. Some repairs will be unexpected of course but a lot can be determined through a simple walk-through of a property - and then fine tuned with an inspection.
Glad you posted and even more so that you're practicing what you're learning. Rock on...
