50% Rule - Where do I keep the money?

2 Replies

Hello all! I’m familiar with using the 50% rule as a napkin number, which includes more immediate things like upkeep, property management, and property taxes; but for the long term things like a roof, what do I do with that money? Here’s a scenario: (Let’s talk about just the roof as an example, as it’s degradation rate is fairly stable. Unlike a water heater which could technically break down at any time without warning) I buy a property with a brand new roof. Like a smart investor, I religiously plan for a portion of my gross rent to go toward replacing that roof in 20-30 years. In the mean time, where does that money go? Should I have an account specifically for long term money holding? Should I put it into CD’s? Or on items that I can pretty reliably predict to be long term expenditures, can I use that money as down payment on another property (eventually) which will build value, and then be available to finance against when it comes time to replace the roof of the original property? It seems to me that with VERY careful book keeping, and plenty of crisis planning to ensure adequate liquidity in the event of a freak occurrence not covered by insurance, that there shouldn’t technically be an issue with this. Please share what you do, why, and your thoughts on using a scenario like the one I described. Thank you!

I use a Heloc on one property as my capital expense account.  The heloc I have in place is revolving so I'm only paying for the money when I use it. This way I have money sitting but its someone else's money so mine can be used to buy more properties.  If you do not have something like this set up keep a separate account for capX so that when something comes up you have the capital to fix anything major.  Rule of thumb is 3-5k per property depending on condition of said property.

That’s a great way of doing it, thanks James! Does that offer any sort of tax advoidance advantage as well? Everything I’ve read says that new property acquisitions with money from gross income can’t be considered an expense, as it adds to the value of the company. A durable good or something like that the IRS calls it.

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