In the process of closing on my first deal as well but I have been an investor in different venues before. My plan is to just save a year's worth of extra income after PITI have been paid. After that I plan to use the cash flow to buy other properties. But I have credit cards with $30k limits at 4% annual interest rates and investment funds in the stock market should I need an emergency fund.
At the end of it all, it is your choice on how much to collect for repairs, vacancy, cap ex, etc. If I know the roof is half way in it's life-cycle, I will probably save up a lot more than 5% for cap ex. Honestly for the first one, I think saving everything in the first year or two to build a cushion is not a bad idea.
Originally posted by @Ayne C. :
In my analysis I calculated 10% for cap ex, 10% repairs and 5% vacancies. I could allocate cash up front, just not sure how much to allocate.
When was the property built? when was the last time the ac has been serviced? age of roof? how old is plumbing? electrical? If they still have atleast 5 years left on em, I would just allocate two months worth of rent in cash up front. No need to put too much up in if you are not expecting a big expense in the near future.
Probably should assume each unit has 1.5 month vacancy if you expect someone to move out. Repairs estimates should come out of inspection rpts.
I don’t understand why people use Capex on their monthly expenses when it’s not an expense. It’s an improvement of the property. This cost should be used in the beginning as part of your initial capital. I understand people just use 10-20% as a reserve for a rainy day but on a boarder line deal it will push your CF very minimal and enough to get more passes then offers.
You are better off analyzing the remaining life of major Capex components like roof, windows, plumbing, furnace, AC and have a reserve fund set aside as part of acquisition cost.
As others have said, saving a percentage of income is not an accurate way to calculate CapEx. Your CapEx depends on many factors such as age of the building, location, recent upgrades, etc. Make a list of all your CapEx items and break it up into monthly costs to replace it based on it's lifespan and current condition.