Planning for Capital Expenses (Reserve Study)

2 Replies

As we are looking to be at 15-20 doors this year, I'm starting to examine how much we should really hold in reserves. The biggest part of that is determining our capital expenses for replacements as things age + any intentional updating we want to do in order to force equity / rents. 

I am tweaking on a spreadsheet (http://cl.ly/image/1b0r2q3j2a41) for each property and was wondering if anyone has thoughts or resources on the following:

1) I understand that in theory, you take a 30yr roof and divide by 30, But in practice, I only plan to hold a particular building 7-10 years. Do I ignore anything a couple years past my hold window?

2) How does this work in reality for a longer term hold? Are people really packing away 3.5% of an inflation adjusted roof annually? Seems a bit silly considering the opportunity cost of that capital. Do I wait until 10 years before the roof goes and then begin saving? The difference between est lifespan and actual with large items can vary by nearly a decade.

3) Is there a nice cost list for replacement value for a lot of the assets listed? I know a bunch of them will depend on the size of the property, the quality, the volume and the location. With that much variability, I'm having a tough time and was wondering if there are industry standards.

4) In your experience, are my lifespan est. accurate? Where do you tend to pick the averages? I have water heaters that go in 10 years and others that were installed in 1991 and are still chugging along fine. 

5) What inflation rate is everyone using right now? I'm guessing at 3%.

Not the sexiest topic, but as the numbers get bigger, it is starting to make a really big difference. I really appreciate the insights.

Originally posted by @Shane Pearlman:

As we are looking to be at 15-20 doors this year, I'm starting to examine how much we should really hold in reserves. The biggest part of that is determining our capital expenses for replacements as things age + any intentional updating we want to do in order to force equity / rents. 

I am tweaking on a spreadsheet (http://cl.ly/image/1b0r2q3j2a41) for each property and was wondering if anyone has thoughts or resources on the following:

1) I understand that in theory, you take a 30yr roof and divide by 30, But in practice, I only plan to hold a particular building 7-10 years. Do I ignore anything a couple years past my hold window?

***If you don't expect to repair it, why hold reserves for it?

2) How does this work in reality for a longer term hold? Are people really packing away 3.5% of an inflation adjusted roof annually? Seems a bit silly considering the opportunity cost of that capital. Do I wait until 10 years before the roof goes and then begin saving? The difference between est lifespan and actual with large items can vary by nearly a decade.

****The more units you have, the better averages you will get. May 1 component, or even several, last longer than originally expected? Sure. Will all 15 ovens last 10 years longer than expected? Probably not. On average, some things are going to break. I wouldn't sweat the 3.5% inflation.. But have enough on average for the average things, depending on your personal finances.

3) Is there a nice cost list for replacement value for a lot of the assets listed? I know a bunch of them will depend on the size of the property, the quality, the volume and the location. With that much variability, I'm having a tough time and was wondering if there are industry standards.

***Don't have a standard one. And will vary SO much, especially on your high end properties. Others' spreadsheets may be worthless for you. Your ovens probably cost 10X more than the used ones in the Midwest, or that I bought for my East Oakland lower-end rentals..

4) In your experience, are my lifespan est. accurate? Where do you tend to pick the averages? I have water heaters that go in 10 years and others that were installed in 1991 and are still chugging along fine. 

***Use the average, or the manufacturer's expected life.

OVERALL ADVICE:

Do you keep enough cash? Do you have lots of access to cash? Is that cash expected to be available consistently? Or dry up during a crisis?
Reserves Reserves Reserves. It is costly when you're looking at your cost of capital, but so many people have been wiped out by not having them. I keep some for reasonable repairs, in addition to being able to turn units, give back deposits, etc.. But this is also because I have partners, and would rather keep a cushion than have to do capital calls frequently.
Don't get too caught up in the details. 2% whatever inflation. Who cares?
Just capture the big things, a little extra so you can sleep well at night, and "harden" and grow/diversify your credit sources to the extent you can.  

@Shane Pearlman , looks like a great study. Were you able to finish it? I would love to know the very answers to the questions you asked. Were you able to find them? Thx!

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