Quick Bookkeeping question

8 Replies

Received our first rent check. Feels good. I have certain amounts that i want to divy up to go towards future expenses (capex etc). We also set up a competely separate account for the house. Do we leave that excess in the account after paying the mortgage? So if rent is $1500, the mortgage is $800, and all future expenses (capex, vacancy, maintnance) are $500 (these arent real numbers im just making them up) do we just keep leaving $500 every month in the account until we need it?

What has worked best for me is to leave the excess in the account, take a spread sheet and divide it up into columns. So one for cap ex, one for maintenance, one for vacancy. Divide your excess up among those three columns as a positive entry with a date next to it in an adjacent column. Then any time you spend from a column you enter that as a negative.

For clarity sake I also found that this go to be a lot of extra work as you are essentially creating a budget and then tracking your spending relative to that budget. You are performing a lot of accounting for one rental property. What I do now is just track my spending as normal. I spent about 4 months building a buffer of $10k on my 10 unit deal, mostly for taxes, but also for incidentals. If i get to the point I need to replenish because I dipped below that level, I stop taking a monthly check and refill the buffer.

I use this spreadsheet to account, it came from BP library but I corrected a lot of the formulas and look up tables and added several lines for income. Inbox me if you would like to check it out.

@Nick Causa

@David Hildebrandt is pointing you in the right direction. Even when rental property investing, you need to be thinking on a personal finance level as well- in this case, following the logic of an emergency fund. 

Most personal finance gurus like Dave Ramsey say to build that up before you start doing anything else. So along those lines- I would do exactly what David does. Determine what your emergency fund (CapX) number should be, then fully fund it before you start taking money out.

I know many in this forum don't go about it this way, which I also understand as well from a purely financial side. I just personally can sleep better at night with a fully funded emergency fund early on!

Congrats on the first purchase!

@Nick Causa

I'm about to get on a soap box for a minute - save up for an emergency fund. I just hit this week with an unexpected $10k in CapEx. Long story short, the previous owner of my property pulled a fast one on me and it caused problems 5 years after I bought it.

Anyway, I only have one rental that I live in so take it for what it's worth, but I agree with @Alan Rohrer . An emergency fund is a self insurance policy against losing EVERYTHING when you have a problem. Many who agree save about 6 months of mortgage payments as a rule of thumb. However, I see many investors use credit cards as their emergency funds, but spread across enough time you WILL have an emergency and therefore you WILL use your credit card. My philosophy is that I can always go into credit card debt and pay 20%+ interest to them in an emergency, but I choose to have an emergency fund and pay the price of losing to inflation (~3%) instead. It also lowers my risk and gives me more options. To quote Warren Buffett, "You only find out who is swimming naked when the tide goes out." What I take from that is you never see who is financial stable until there is a problem. Better to be ready for it with a solid emergency fund than risk it all. I feel better now that I got that off my chest :)

Thanks for all your help with this guys. My wife and I built up just about $10k in personal emergency savings before buying the property but thats personal so I’d rather have some additional right? I assume you all recommend having that amount for rental purposes as well?

Also, would you say that once you hit 10k then that is for all things expenses? Like vacancy, capex, and maintenance? Or should there be more for each? And i assume you’d keep building that up even though you have a desired amount whatever that is?

I think the buffer has to be enough cushion to allow for your biggest possible expense. For me that's the boiler, or the roof. I would say on a duplex or even a quad like 5k is enough. Remember that most things start to give you signs they are failing month or years before they actually "let go" so if you are often repairing a large expense item be wary and contribute more to your buffer.

Follow up question: we have the two properties and i like the idea of building up $10k for each but do any of you guys keep that invested in say a bond index fund of anything? I hate the kdea of $20k just sitting in two different bank accounts if were not using it all that often.

I just want to clarify my input. I have 10K buffer on 9 unit, 7600 sq ft building. I don't think you need that much for what you are talking about.

Cash is literally the worst investment ever, as inflation is GUARANTEED. So what your 20k will buy today, it will not buy 10 years from now. Therefore, putting your money to work is definitely a good idea. Could you use some of that money to buy a note, or a portion of a note that finances a flip for a fellow investor. Something short term, with a 12 month payback that is secured by real estate should you need to foreclose. Then if you had an emergency repair you needed to finance, at least you know that capital would be returned to you in the short term, and is earning a nice return, usually 8 to 12 percent.