Duplex Questions - Saving For Repairs

5 Replies

I'm analyzing a duplex deal that I see in my market.  I plan to live in one unit and rent out the other.

Analyzing this multi-family deal there is a separation between repairs that need to be made and repairs that will be beneficial to make.  A repair that I would like to do but may not be in the budget yet is install vinyl plank flooring and removing trees around the yard to create less maintenance.

1. Do you feel that saving for these repairs as a percentage of monthly rent is the best approach if these types of repairs?  My goal is to not sacrifice initial cash on cash returns while creating a plan to create a solid rental.

Hello,

What i usually do, is to set a side "emergency fund" of X amount of dollars...whatever you are conformable with and then start taking 5% capEX and 5% maintenance of the monthly rent

Originally posted by @ Kyle Atans:

Hello,

What i usually do, is to set a side "emergency fund" of X amount of dollars...whatever you are conformable with and then start taking 5% capEX and 5% maintenance of the monthly rent

 thanks for recommendation, I will do that

Originally posted by @ Kyle Atans:

Hello,

What i usually do, is to set a side "emergency fund" of X amount of dollars...whatever you are conformable with and then start taking 5% capEX and 5% maintenance of the monthly rent

Question: Say you want to compare duplex units. All similar construction with comparable concrete walls and shingle roofs. All are equivalent in size. All are located in B class inland areas. All units are as originally built and nothing has been replaced or improved (including HVAC). The only thing that varies is the year built. What reserve % would you estimate for CAPEX on the structures considering the following year built ranges?

From 1960 to 1970?

From 1970 to 1980?

From 1980 to 1990?

Or am I over thinking it?

What you are asking for is how to include both 1) Monthly Maintenance and 2) Capital Expenditures into your Pro Forma, or income/expense spreadsheet.

1) You can estimate a monthly maintenance 'expense' as a percentage of the GOI or a set value of say $200 per month. You may also want to assume this maintenance fee as how much it will cost you to hire a property manager (say 5% or so of monthly rents).

2) Your capital expenditures can be grouped into 2 general categories: 

A) Unforeseen big-ticket items that will break and need to be replaced (e.g. Hot water heater, boiler) and may not necessarily increase the value of the property; and 

B) Improvements to the property that will increase the value of the property (e.g. paved driveway, new/replaced deck)

There is a grey area for something like a new roof which is required over time but most likely won't increase the value as much as the parts/labor costed to install the roof. In general, I would budget out the required long-term capital expenditures on a monthly/annual basis, while I would leave general improvements out of your Cap Rate & ROI calculations.

  1. When you buy an old (older than 20 years old property) and you do not have a proof of any repairs/updates, it's all depends of your comfort zone level. You definitely need to set a side an X amount of dollars for capEX and maintenance every single month. How much ? Well, we always said % of X amount, but the true is that you calculate the amount first and then you put % in your spreadsheet. Here is what i mean to say: On 35k property, which makes 500$ rent, 5% is only $25, which clearly is not enough. Well, on 500k property, which produce $4000/month rent, 5% is $200 which could be a little too much....so you really have to answer what you are conformable with, how much is your cash flow and how much you an afford/want to put a aside. I usually try to put $100 cap ex and $100 maintenance every month regardless of the percentage. It's just happened to be around 5%-6% in my case...
  2. Also, for emergency fund....well again...this is why you do a property inspection. If on the inspection everything looks decent, than may be put a side $2000 - $3000 on 100k property. Well, if you see that the roof is duo for repair soon, and AC is acting up and water-heater is 20+ years old....well..then may  want to have at least 8k-10k ...

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