I'm looking to purchase a multifamily Unit in the Southern California area. How much money should I have in reserves when purchasing a multiunit? What is a general good rule of thumb to go by?
A lender may have specific requirements like 6 months of mortgage payments.
Also you should have a capital reserve account. this will take some calculation. If a water heater costs $600 installed and it lasts ten years it is costing you $60 a year. However if it is already 5 years old, it only has 5 years of life remaining and you need to put aside $120 a year.
Do this calculation for roof, furnace, windows etc. and any thing else you can think of.
There may be general rule of thumb but I am not aware of it. High level professionals will use a cap reserve calculation like I described.
I like maintenance reserve accounts and I live Home Warranty Plans.
As Ned mentions include EVERYTHING you can think of including services such as termite repairs, tree pruning and things that may be way down the road such as driveway repair or replacement.
Personally I detest the home warranty scam. When you need them the most is when they take their time. For example we had an A/C fail and it (being summer) took them nearly a week to get someone out. Under a month later it fails again. They are into hurry to get back out for warranty work. Turns out that guy can't fix it because they need two people. Wait one more week to start with another contractor. Once they diagnose the problem, wait for the part, THEN they will schedule the next appointment, a week out. (We did get the tenant temporary A/C, for the record.)
A big part of the problem is that they don't have the capacity to handle seasonal demands because they pay bottom of the barrel. The people who have a great reputation don't need to take these jobs. Even if it works out financially, it isn't worth the brain damage that goes with it. If they need to replace something in its entirety, guaranteed they will want to bring in another contractor for a second opinion. Nothing is an emergency - your tenant would love no A/C on a week of 95-105deg days right?
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