I'm new to investing and currently working on purchasing my first property with the support of my dad as a financial backer. He'll be investing a chunk of money, and I'm trying to figure out how to best allocate it between the down payment, closing costs, reserves, and CapEx.
Specifically:
How much should I plan to have in reserves starting out? Would a couple months of expenses be considered safe, or should I aim for more?
Should I build up a separate CapEx fund before closing, or can that come later as long as reserves are solid?
I want to set things up responsibly from the start and would really appreciate any advice.
Without knowing the age and condition of the property, as well as number of units and whether there is currently cash flow coming from the property, it's difficult to answer your questions too specifically.
If you know you have specific CapEx expenditures coming up in a defined period of time, you need to allocate enough per month to cover that cost when it becomes necessary, unless you are going to finance a portion of the cost at the appointed time.
Assuming you have cash flow from the property, you are likely going to have certain expenses that come out of that cash flow like utilities, taxes, and insurance, and if you have a mortgage, that would come out of the cash flow as well.
Whatever you have left over on a monthly basis, I would recommend in the first year or two putting all of that into reserves until you build up a decent balance in your reserve account.
Reserves are an asset, whereas CapEx is an expense, but from an accounting perspective, it's not an expense that gets deducted in the year it is incurred. Instead it adjusts your basis, and you get depreciation expense on an annual basis.
As far as the capital your dad is providing, I would allocate only the minimum required for the down payment. The closing costs are what they are, so that will be allocated. And then whatever the property needs to become rentable, you have to do that. If it is already rented, but you have required repairs, do what you need to on that, and if there is any capital left over, put that into reserves, as you work on growing that reserves account.
