I have a rental in a suburb with some nice modest appreciation. All in for $121k, worth roughly $145k. Nothing needs to be replaced in the near future, more long term expenses. I see two options
1. Set aside $166/m for future CapEx. I did a long term breakdown to get this number of each item
2. Have $5k in reserves. In 15+ years if something needs replaced do a cash out refi to pull out money to pay for CapEx. Basically the house/bank pays for the CapEx cost, I don't
Does anyone utilize strategy #2? Seems to be the best strategy. Option 1, the money would be stuck in the bank getting no interest (losing money due to inflation).
@William S. You are correct that most people do option 2, for a number of reasons. Option 1 implies that you have no reserves starting out. That is a bad idea.
Reserves, like an emergency fund for home finances, is about having access to enough liquid cash to be able to ride out financial surprises. If you have less liquid assets then that fund needs to cover them time it takes you to liquidate them. In your option 2, that would be the time to refi.
The $5k in reserves is for is something major breaks to cover (unexpected). Refi is for long term replacements... Thoughts?
Scale can work against you though too. I had 3/4 properties be vacant in the same month.
Given the condition I think $5k is enough. Plus, I work full-time too. I don't want to much cash. Lost opportunity cost.