Determining an appropriate reserve fund based on property age

5 Replies

Hi,

I'm looking to properly estimate expenses in my model when searching for deals. I'd like to be able to get a general idea of the expenses before doing further research into the property to determine specifics (like determining the age of appliances). I'm primarily looking for single family homes/condos/townhouses/apartments in the Seattle area - at least to start with.

In the model, I already have 2% of the purchase price set aside for maintenance, but I'm curious how much more I need to budget into this category based on the age of the unit. Does it make sense to increase the maintenance or reserve budget for a property that is 30 years old compared to one that is 5? Is there a rule of thumb that can be used to accomplish this? Or does it really depend on the specific age of the unit's components (water heater, appliances..), which would require me to do further research anyway?

Additionally, should I change what I budget for maintenance and/or replacement reserves for an apartment vs a house, considering that with an apartment there would be no concerns about the roof, yards, or any outside features? 

Thanks guys!

@Adrian Chu - You might want to connect with @Nicholas Ball , looks like this might be right up your alley.

@Kathleen Wilcox works a little south of Seattle I believe, but she may have some insight for you as well on property management costs. @Ryland Taniguchi and @Sara Hoang have both done flips, maybe you can ping them regarding renovation and rehab costs.

Originally posted by @Nicholas Ball :

Hi,

I'm looking to properly estimate expenses in my model when searching for deals. I'd like to be able to get a general idea of the expenses before doing further research into the property to determine specifics (like determining the age of appliances). I'm primarily looking for single family homes/condos/townhouses/apartments in the Seattle area - at least to start with.

In the model, I already have 2% of the purchase price set aside for maintenance, but I'm curious how much more I need to budget into this category based on the age of the unit. Does it make sense to increase the maintenance or reserve budget for a property that is 30 years old compared to one that is 5? Is there a rule of thumb that can be used to accomplish this? Or does it really depend on the specific age of the unit's components (water heater, appliances..), which would require me to do further research anyway?

Additionally, should I change what I budget for maintenance and/or replacement reserves for an apartment vs a house, considering that with an apartment there would be no concerns about the roof, yards, or any outside features? 

Thanks guys!

@Alex Chin , thanks for the mention.

Each property is different.  Age is one factor but I have seen 3 year old properties get trashed as if they were like 30 year old ones and 30 year old properties as nice as 3 year old ones.  

Similar to how condo associations run their reserve studies, you would want to analyze each item (i.e. roofing, siding, etc) and their remaining useful life as well as the cost to replace.  Then, you can determine how much you need to allocate each month to budget for potential repairs.

With apartments, you have economies of scale.  X units sharing 1 roof vs 1 unit having its own roof, etc.  You would still have to maintain everything.

But in your last question, are you trying to compare condos vs houses? With condos, the HOA generally takes care of many of the outside features like roofs, siding, etc in exchange for monthly HOA dues.

Often for average size average type apartments (5-10+ units), a quick number I will use is $550/unit/year. Banks seem to typically factor a $250/unit/year capital reserve but that's probably not today. I am not sure they have adjusted for inflation over time. This would not be a great figure for smaller or single-family as it really needs to be estimated on an individual basis (in my opinion), with a timeline on when what is anticipated needing replacement (that's what I do on smaller buildings I buy). As Adrian said, a lot depends on the property/tenant. I did a brand new carpet and paint and had a tenant for one year who just moved out and her kids were really hard on the place. I am having to repaint and re-carpet just one year later. Usually I would anticipate getting much more life out of it. This summer I oddly had water lines break on three properties - I would have never anticipated water lines breaking this early. The older property, maybe - the ones built in the 90's though with poly that has a useful life of 2,000+ years, I wouldn't have anticipated. Whoever installed it was careless and left chunks of concrete and rocks set next to the line which over time rubbed and broke the line. 

Instead of making a steady state linear function think of it in terms of big ticket items:

Heating unit $3000 (Every 10-15 years)

Plumbing $2000 (Every 20 years)

Roof $5000 (Every 10 years)

Carpet 2k every 5 years

....

*my lifecycles and dollar estimates are wrong but this is simply a lifecycle cost analysis

Thanks for all of the information everyone. I suppose it isn't really a good strategy to rely solely on age as a factor, but I do like the idea of a life cycle analysis for big CapEx repairs. @Adrian Chu I hadn't considered condos that have HOAs, but that makes sense that they would take care of a lot of external repairs. Actually sounds like a more favorable option for easing into buying rental properties.

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