Rental Property Investor · Franklin, TN · Member since 2014 · 145 posts · 44 votes
Wondering if any of you out there have some sort of "formula" you use to estimate repairs/maintenance and vacancy reserve costs when evaluating a new property?
I have been sort of guessing on mine so far and doing 5% for vacancies and 6% or so for repairs
Thanks
My magic number is 0%, because I don't see the point. If I'm renting a house for $500/month, that means (at 5%) I'm saving a whopping $25/month...or and enormous $300/year just in case, just in case what? If my roof leaks and I have to replace it, at month 6, am I going to be able to with all that money I'm saving per month up to that point ($150 = 6 z $25/month)?
OK. let's say I'm renting for $1000/month. Now at $100/month I'll have some big time dollars saved up (at month 12) = $1200. Still can't replace my roof, and at 6 months, with $600 I can do a half way decent "patch job"...maybe.
Another reason I don't take anything out is all it will do is take me out of a good deal...for no good reason.
1 - Before I factored in the "fudge factor", I cash flowed at $350/month...and the house passes one of my criteria.
2 - After I factor in the "fudge", it cash flows at $250/month...and I pass, when I shouldn't.
The answer is to calculate how much the big three would cost you to replace (roof, HWH, furnace-A/C) and set it aside from the beginning as part of your purchase/rehab cost. One great source for this is a LOC. ANother great source is the extra money you get when you "cash out" refi.
@Sharad M. Same answer. A new investor should be lining up their risk strategy as part of their investment strategy. One without the other is a waste of time, and money. All investors should have a LOC before they start investing. No exceptions.
@Joe Villeneuve Sure. Having a LOC is part of your investment strategy. I wish every investor thought the same way, because that would weed out a lot of competition :-)
So if I understand correctly, if an investor has the money set aside for down payment, he should have the capital expense reserve set aside in a LOC?
What is the collateral for the LOC?
How much in LOC would you suggest a new investor start with?
So the amount of LOC doesn't matter. If they qualify for $500, they should get started? You don't suggest a minimum LOC amount for a new investor to get started?
@Sharad M. Go back and read some of my previous posts in this string. It states the answer you are looking for. Your minimum number is based on whatever the base costs are to replace/repair the top three items for rehab for each property you own...up to a point where it just becomes redundant. In my case, with my properties, the minimum amount needed is around $5000.
So the amount of LOC doesn't matter. If they qualify for $500, they should get started? You don't suggest a minimum LOC amount for a new investor to get started?
Investors can use current rents or credit to pay for repairs. I like using credit cards for unexpected expenses. I sometimes use CCs to buy a property outright, and use rents to pay them off.
I normally set aside a percentage of rents for Cap ex and vacancy, how much depends on what condition the property is in. Also depends what kind of property we are talking about. My multi family's I use a little higher vacancy rate. With that being said I have never taken money out of the vacancy account for vacancy as I almost have enough money in it to run all my rentals for a month. I like @Joe Villeneuve s answer the loc is a good idea.
@Bryan N. Hi, quick question about your response here: so, you have a separate bank account for EACH property that you own? I'm curious how many properties you own each with their own account, and how you keep track of all of that! I'm imagining a very organized record keeping spreadsheet? That's been on my mind as I gear to up get started, wondering what the best way to manage all of the cash flow and money I set aside for repairs, cap ex, vacancies, etc. Thanks in advance for your response!
I have 5 properties for now. Separate checking and savings for each. It’s not hard to organize. A basic spreadsheet is all my accountant needs. Honestly, I don’t worry about setting money aside for all that stuff. Every month I transfer the profits to an Ally account and it stays there. I pull money out when I need it for myself, taxes, repairs or whatever.