Question for the landlords here:
Member since 2021 · 14 posts · 1 vote
Question for the landlords here:
10 Replies
- Staten Island, NY · Member since 2013 · 120 posts · 58 votes1d
I'd stop picking a flat percent and build it from the actual age of the big items. List the roof, AC, water heater, and furnace if there is one, guess what each costs to replace and how many years it likely has left, then divide to get a monthly number. On a house with 20 year old systems, a big bill could be close, and 5% of rent on a modest rental won't cover a roof and an AC landing in the same couple of years.
So on older houses I'd underwrite at 10% and see if the deal still works. On newer or recently updated ones, 5% can be reasonable. If a deal only works at 5% on a house with tired systems, I'd call it thin rather than good.
Whatever number you use, actually move it into a separate account every month so the money is there when something fails.
- 1dNoah WrightBusiness MemberUSA, Nationwide · Member since 2024 · 299 posts · 117 votes
You're right that 5% is wishful on those older houses, and not wanting to kill every deal on paper is a fair worry. On a deal you're evaluating, one way through it is to stop calling a 20 year old roof or AC capex. If it's near the end of its life, that's a purchase cost for the offer price or the rehab budget, and the monthly reserve only covers what comes after. Most DSCR lenders size the loan on rent against PITIA, so capex never enters that ratio. A house can clear 1.0 on the lender's math and still run negative the year a condenser goes. The lender's number tells you whether the loan works, not whether the house does.
- Chicago, Cook County · Member since 2026 · 18 posts · 2 votes1d
David, I agree with Jimmy: build the number from the house, not from a percentage. I'd add a few things on older houses that a roof-and-AC list tends to miss:
- Plumbing. Galvanized supply lines and cast iron or clay sewer lines can look fine and still be near the end. A sewer scope is cheap compared with replacing a main line.
- Electrical. A newer panel can still be feeding old wiring. Ungrounded outlets or old cloth wire in the basement are worth pricing in.
- Water. Gutters, downspouts, and grading are cheap to fix, but when they're ignored they turn into foundation and basement bills.
- Prior owner work. Older rentals have usually been patched a few times, and that work tends to fail sooner.
Then check your timing. Two 20-year-old systems can easily fail in the same couple of years, so ask whether your reserve could cover both at once. If the deal only works at 5% on a house like that, it's thinner than it looks.
Kyle
- Investor · Simpsonville, SC · Member since 2017 · 46 posts · 30 votes1d
In my opinion, you have to be careful in how you think about CapEx. Lets compare two deals:
Deal A
Turnkey purchase for $200k
$0 CapEx within first few years of ownership
Valued at $225k
80% ($160k) financed
Deal B
Purchased for $160k
$40k of unexpected CapEx within first few years of ownership
Valued at $225k (after CapEx spend)
80% ($160k assuming financing of CapEx) financed
These are both the exact same on paper. Deal B is going to "feel" like it is not penciling if you are constantly losing cash to CapEx that you are covering by financing those Capital Expenditures. Does that make Deal A a better deal? Not really....
One distinction here would be some CapEx adds value (kitchen upgrades for example) whereas other CapEx adds little to no value (Ex. plumbing system). I don't mind spending CapEx on the former, but the latter can be tough to stomach.
- Realtor · Memphis, Shelby County · Member since 2026 · 166 posts · 56 votes22h
I use both, because a flat percentage alone can hide what is actually wearing out. I start with an item list: roof, HVAC, water heater, appliances, flooring, and major systems, with a rough remaining life and replacement cost for each. That list tells me whether a flat reserve is realistic for that particular house, and older homes usually need more than a newer one. Then I set a monthly reserve based on that list, and review it each year or after a big repair, rather than treating the percentage as permanent. The point is not to predict every repair exactly; it is to make sure the money is there when a big item fails, so one roof or AC replacement does not wipe out a year of cash flow. If 5% feels low for your older houses, trust that instinct and build the reserve from the items, not the other way around.
- Member since 2021 · 14 posts · 1 vote21h
thanks Kyle, Noah, this is really helpful. the sewer scope point is a good one, cheap insurance compared to digging up a main line. and Noah your right, i was lumping a 20 year old roof into capex when it really belongs in the offer price. I see this alot on the lending side too, the DSCR math only looks at rent vs PITIA so a deal can pass the lender and still bleed cash the year the AC dies. going to price the big items by age from now on and stop using the flat 5% on older houses
- David
- 12hMatthew MorrowBusiness MemberInvestor · PA - NY - NJ · Member since 2019 · 859 posts · 303 votes
@David Ghazaryan I don't really use one percentage either. On the older houses I look at the roof, heat, AC, water heater, and plumbing, guess how many years each has left, and price those first. A 20-year-old roof isn't a monthly percentage, it's a bill that's coming. I'd rather know that before I buy, either in the price or in reserves. It does kill some deals, but probably ones that should have been killed. Interested to hear what others have experienced with this too.
CORE Team | Realty ONE Group Supreme548 Reviews - 10hDivin KanyamaBusiness MemberAccountant · Seattle, WA · Member since 2025 · 581 posts · 244 votes
@David Ghazaryan I think the 5 versus 10 percent debate misses something, because a percentage of rent doesn't know how old your roof is. A $1,000 house and a $2,000 house can have the same roof, so the same percentage gives you very different cushions.
What I'd do on older houses is build the reserve from the big components. Take the replacement cost of each one, divide by its expected remaining life, and add them up. As a simple example, a $12,000 roof with about 20 years of life is $50 a month, and an $8,000 HVAC system with about 15 years is roughly $44 a month. Those two alone are close to $95 a month before water heaters, flooring, appliances, or paint, and they're only illustrative numbers, so use quotes from your own area. On a 20-year-old roof and AC, you're likely closer to 10 percent than 5, or you need to price in a near-term replacement.
That approach also keeps you from killing good deals. A newer house with a younger roof can honestly justify a lower reserve, while an older one needs more, and the deal should still work at the higher number. If it only works at 5 percent on a house with tired systems, it's probably thinner than it looks. Just my take, so check the numbers against your own inspections and contractor quotes.
- Member since 2026 · 21 posts · 1 vote8h
Yeah 5% on a house with a 20 year old roof and AC is wishful thinking for sure. After 20+ years of inspections those are the two I'd just treat like they're due, cause on houses that age they usually are.
And heads up, insurance is changing everything right now. Alot of companies are getting strict about the age of the roof, electrical and plumbing, and some landlords who've been around for decades can't even find coverage on their places. Yikes. I'd call your agent before renewal so it doesn't catch you off guard.
Randy, Bunklow
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