CapEx Budgeting - $5k in reserves + cash out refi?

5 Replies

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.

Personally, and this is what I do, I think your reserves need to be liquid. Or atleast something you can tap into in a few days. Depending on what the economy is looking like the refi might not always be there, I have heard guys on this site that are a lot smarter than me and been doing it longer mention this. If your not carrying a reserve for each property and just banking on a refi to get cash in an emergency your setting yourself up to fail.

The $5k in reserves is for is something major breaks to cover (unexpected). Refi is for long term replacements... Thoughts?

I guess it just depends on your risk tolerance and the age of major cap ex stuff. Every investor will be different. Here is a scenario. You have the one house and 5k in reserve... you end a lease and have a 2 month vacant period you need to cover the mortgage for and the furnace or ac or some other big ticket item goes out. that will likely cost more than 5k. I know it's a pretty extreme example but not out of the question. If you have 10 houses and 5k in reserve for each that is a little different because the law of averages start to work in your favor. Just my thoughts man, at the end of the day everyone will have a different comfort level. Good luck with whatever you end up deciding will work best for you.

@Matt P.

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.