CapEx, Maintenance, Vacancy, and Misc Question

7 Replies

BP - this may be be a dumb question, but it is something I have been debating for a couple weeks now. 

i actually just closed on my first property and have benefited more from this website and the tools, people, and information gained in order to make my first deal a reality. 

By no means was it a home run $50k profit flip, a SFH that cash flows at $550 or anything like that, but it is a SFH that cash flows after all expenses (very conservative expenses) of around $176 per month +/- $25 depending on which assumptions I tweak slightly

That being said - after taking out significant portions of $ and setting them aside for CapEx, Maintenance, Vacancy, and a MISC category (and of course PITI and property management) all of which are running through my model, do you guys actually keep the money aside in a slush fund or separate account or is it for modeling purposes to understand that you still cash flow after all these major and foreseeable future expenses. I am currently in the mode where i want to scale up quickly and having the extra cash flow per month would make it easier and quicker to acquire my next property while still knowing that in XX amount of years i will have to replace a water heater and there will be maintenance come end of the year when tenants turn over. Hypothetically could i use the money from my monthly savings, and cash flow from my property to scale and because it is already modeled in use a CC or cash on hand at the time of the maintenance or CapEx or is this a bad strategy


@Phil LeNeveu , I think it is a bad strategy. I have a separate account which I send the monthly CapEx, Maintenance, and Vacancy to be used for just when those things arise. I'm not sure what your current reserves are like, but it is very difficult to have enough properties where after paying your monthly PITI you would have enough cash flow to be able to say replace a roof at any given time. If you are just using it for modeling purposes (the calculations) and you have multiple properties that all get hit w/ different issues at or around the same time, you can find yourself over-leveraged without enough funds to cover all your expenses.

@Jason Gines thanks for the input Jason - i will probably open up a separate account after all. If the property has been more or less fully rehabbed does that change any of your assumptions?

Originally posted by @Phil LeNeveu :

@Jason Gines thanks for the input Jason - i will probably open up a separate account after all. If the property has been more or less fully rehabbed does that change any of your assumptions?

Fully rehabbed you can maybe reduce what you set aside for CapEx and maintenance. Maybe.

@Phil LeNeveu , it all depends on your level of risk tolerance.  It doesn't change mine.

@Debra Grumbach thanks! Yea of course I dont want to lose my shirt and I am trying to be very conservative, but didn't know if typically snowball most of their 1st property cash flow and try to get the 2nd, 3rd etc before some of those big capex items come to fruition

The property has a brand new Water tank, brand new furnace, and roof is about 5 years old - so knock on wood nothing from those happens in the near future - of course unpredictable things can happen and maybe best to keep liquidity 

@Phil LeNeveu , just remember what each item is there for.  A new roof may be twenty fifteen to twenty years away, but if you are putting aside that money every month then the money will be there when the time comes.  If you find you have no trouble with your current vacancy rate, that may not hold true a few years from now if there is a market downturn in your rental area and your vacancy rate becomes an issue, which it wouldn't be such a hard hit if you'd been putting aside that % of rent every month in anticipation for it.  And maintenance comes up regularly.  Things break.  Electricians, plumbers, and handymen cost money.  Treat this like a business.  Before you purchased that property it was all hypothetical, now you are actually running a business and if your balance sheet doesn't work out at the end of the day there is only so long you can stay afloat.  If you already have a significant amount of reserves in place, then you can adjust for that, but if you don't, it wouldn't be wise to just assume that a newly renovated property is immune from near-term issues.  This is just how I do things.  Everyone is different.  It goes back to risk tolerance.  I just know that I personally would be stressed the hell out if I wasn't putting money aside in case something went sideways.

@Phil LeNeveu Cap Ex is a term that is used in multi-family and commercial property. Frankly, it's over used on this site. A SFR, for tax purposes, doesn't have cap-ex. I personally have a separate account for rental property, which is a business account. I keep enough money in there to cover major repairs, taxes, and insurance. That's it. Emergency fund. Everything above that is used to reinvest in more property. If you only have one house, then this is more important than if you have 100 because a vacancy is a bigger deal if you only have one house. If you have 100, one vacancy is nothing and you have enough cash flow each month to cover any "cap ex" that comes along. Keep this in perspective. As you acquire more doors, the whole cap ex plan is less important because you have economies of scale.

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here