Hello BP friends!
What's the rule of thumb for creating a capex reserve? (as a percentage of total revenue)
At day 1 of owning the property, do you typically have some $ sitting in the reserve?
I have done several different methods over the years. But my latest is to build a 20 year chart of expected capex items and determine what my cost will be over my portfolio. I have found that I need to put away around 60/mo for my SFR and 90/mo for my duplexes. Right now, I'm actually putting away more because I have two upcoming roof replacements.
I have used a metric of 12% for maintenance and capex. I don't like this method as much since maintenance costs depend more on the building and location then the rent.
When I started buying properties I didn't even know what reserves meant. I was about 6 properties into investing, both guns blazing, working half days (12 hours a day) trying to accumulate more.
Today I review a calculate reserves at around 7% of gross rent.
Yes! as of day 1 you want some money in the bank for .....WHATEVER! This should be factored into your cost of acquiring the property.
Connor, no worries. My list is on my other computer, so here goes from memory:
Roof, Furnace, water heater, AC, swamp cooler, lawn (I have some artificial lawns), electrical system, plumbing, windows, siding, kitchen, baths, floors, insulation. I'm sure I missed something.
Many items are property dependent, may be unnecessary, or could be expensed out. These are the items I have planned for on my properties. There may be other large expenses on your properties not listed here. I just think its prudent to set aside enough money each month so a large expense is not a crippling expense.
While not capex, I would not forget routine preventive maintenance items. Those costs add up but can save you long term. Gutters, furnace filters, duct cleaning, dryer vents, detector batteries etc etc.
I don't have any set amounts. The Closing cost and inspection cost will be dictated by the size of your loan and property ( SFH vs. multi unit). Just don't be like some people and account for only the down payment when buying a property.
If possible, I believe having some funds put aside right after closing is important. You never know if something could break right after closing. What if your central A/C went out? Where would you get the funds to replace it? That is just one example. As you hold the property, put some money back each month. As you build your reserves you are building an insurance policy to cover you in times of need (and they WILL come). As your property cash flows, and you have built a good cash reserve, then you can start using excess cash to invest in more units. Within the last few months I put a new roof on one unit and 3 central A/C units in three other rentals. Total cost was about 14K. Having the funds put away for these expenses made it easy to handle them. If your units are newer or have newer systems, you could put away maybe 7% of gross rents. Old units that require more maintenance and replacements might mean holding back about 8% of gross rents. There is no magic formula. I may not actually need that 7%, but having it and not needing it is a lot better than scrambling for funds and not knowing where to get them. Peace of mind has a benefit in and of itself.
John Thedford, John Thedford | 239‑200‑5600 | http://www.capehomebuyers.com
unless there is obvious and significant deferred maintenance, allocate $200/unit aside. Most banks who are lending on the property will automatically underwrite $200-400/unit.
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