How much Cap Ex Reserves do you have?
Right now I am in contract to purchase my 6th rental SFH. I have been putting aside $100/month/property for a while now and have about $10,000 sitting in a cap ex reserves savings account so that I am prepared for those large random expenses. Smaller expenses just come out of my monthly rent. 2 of the 6 homes are mortgage free, so after all fixed expenses (mortgage, tax, insurance, property management) I cash flow $2,700 a month if there are no random expenses (which there always are).
Should I keep putting $100/month/property into this reserve account or at what point would you say I have enough in reserves and allow that $100/month/property go towards the down payment on rental home #7
Thanks
Most Popular Reply
Cap Ex are basically intended to address the larger periodic costs associated with owning property. The major components that fall into this category would typically include things like roof replacement, major system components like hvac, water heater, paving, exterior painting and siding, appliances as a package, etc. The way to address the reserve amount is to determine what it costs to replace these items in current dollars. In addition, evaluate how old and in what condition are these components for each property.
Each of these components has a typical life expectancy that will vary by market area. For example, shingle roof in southern market area may have a shorter life expectancy than in a more northern climate. However, deduct the current age of the component from the life expectancy of the item. That will equate to the remaining term before you might expect to replace that component. Divide the remaining term into the cost to replace the component and that will be your estimated cap ex amount.
There are other influences that will come into play such as inflation of costs between current costs and when you'll need to replace the item but if you invest the allowance amount in a conservative fund that should generally offset inflation effects. If you can achieve higher than average returns on the reserve investment you can even reduce the annual amount invested a bit as the return will partially offset the annual amount needed.
If you have multiple properties and are still funding up the reserve account amounts, you an borrow a bit from one property to cover costs for another but this approach comes with risks as well.
Other ways to off set these costs are to establish lines of credit in advance of needing the money to fund the replacements or borrow against the property(ies) to fund the cap ex, but there is the additional interest expense to consider.
Hope this helps.