Reserves on first MFR

4 Replies

I am under contract on a 12 unit MFR and trying to more accurately estimate reserves for maintenance and capex. I am tentatively planning to buy-and-hold the property to build up the downpayment on the next property and continue growing until I have 50 units. Obviously this can change with new opportunities to trade up, so I am not sure if I should factor reserves based on a longer term approach or try to capitalize on income from a well maintained property to grow my portfolio.

The property is very well maintained and has 12 1-bed units, common halls (carpeted), and a common area (carpeted) with some seating and small kitchenette. Each unit has newer laminate wood flooring, newer water heaters, new vanity/sink-top, newer one-piece tub/shower surround, and older but immaculately kept appliances. The roof and gutters are brand new, the exterior is 90% brick in great shape, and 10% vinyl siding that looks brand new, there is a small parking lot, and the common areas are dated but in great shape. Unfortunately it is baseboard heat throughout (including common areas). All the tenants are 55+ years old and take exceptional care of their units. GRI is $5,785.00, purchase price is $412,000.

For reserves I am wondering if I should try to shoot for a certain dollar amount based on a percentage of rents, or based it off the value of the property?  Should I continuously set aside fund each month forever or maintain that fund at a certain dollar amount?  Or maybe some other method that I am not aware of?  

I have tried reading through the forums to get a consensus, but after doing so I feel like there is no consensus and everyone has a completely different approach and metric so I'm fairly confused as to which direction I should point myself.

The most pain in the butt but reliable method is to estimate the life expectancy of your capx items , estimate the cost to replace, then divide the cost to replace by the life expectancy in months and you have your monthly squirrel amount.Did you get a proforma or operating expenses? 

Edit:  BOMA’s EER survey is for office buildings, but the average repairs/maintenance budget is 15% of the total expense budget. So whatever method you use to budget repairs and maintenance outside of monthly/annual service contracts is going to be a guess for the first year unless the seller is willing to share their numbers. After the first year you can adjust or work on reducing maintenance costs.

@Beverly Meola The seller provided a very rudimentary expense list for 2017, but did not provide anything else.  I am asking for their Schedule E filings for the last couple years to get an idea of what they're profit/loss looks like.  I did start estimating capex by usable lifespan and came up with about $300 per month in savings, however that amount is based off everything on the property.  Maintenance seems like it would be lower than other properties as the tenant base is far more gentle on the property than an average person would be (from what I saw touring the property).  

What I am really wondering is a couple of things.  Whether I should be calculating reserves for maintenance independently of capex, If maintenance can be saved in an account up to a certain dollar level and kept at that amount ongoing for the life of the asset, and if I should front load capital for items like a roof if it's brand new or if I should put those dollars to work acquiring more properties and start saving for those items down the road a little ways (honestly don't know if this is a bad idea or not).  

@Michael Andrews There really isn't a consensus on it because everyone has different properties.  What you need to account for in a building with siding vs. brick are just, well, different.  What you need to account for with laminate flooring vs. tile is just, well, different.  What I would do in your case is basically plot out all of cap-ex items you think might fail over the next 5 years.  Have that just sitting in a bank account somewhere.  The last thing you want to do is find yourself scrambling for money because windows start leaking or the parking lot needs resurfacing.  This is independent of monthly maintenance.

If you have a brand new roof, that won't be on the list. If you have some heavy cracking a concrete parking area, whew, that can be pricey to replace. Who knows what happens when you have baseboard heat, I've never dealt with it. If the property is old you also have to think about plumbing/sewer issues that might pop up. Bottom line, I think most of the "keep 9 months of PITI" pieces of advice as pretty solid. Again, this is independent (for me) of monthly maintenance.

Where the rubber meets the road is when you can see that the roof is about 20 years old.  I know all of the information should suggest "30 year life" but, realistically, it's hard to predict if issues will pop up at Year 21 or Year 31.  You can say the same thing about appliance lifespans, etc.  When you see what's on that 5 year horizon you can start saving up to that needed amount.  But you don't need to frontload for 100% of things.  Odds are the roof won't fail at the exact same time that 14 appliances die at the exact same time as your parking area needs to be repaved.  What it does mean is that you will (in all likelihood) have to be very prudent about rebuilding the reserves fund whenever it does take a "hit" and drops below your threshold.

When it comes to estimating maintenance, my only advice is that it will be higher than you think.  Average maintenance will be a little higher on these 1 bedroom/1 bathroom units as a proportion of gross rents.

That depends on your risk tolerance. If you’re ok shelling out whatever it costs to repair burst pipes or ice dams with all its associated damage or you’re going to rely wholly on insurance or you only plan to hold the property for a very short period of time then use all your capital for investing. Otherwise build yourself a safety net. If you put yourself in a position where you’re holding the property for a long period of time and have no money to keep it up you’ll have a lot of deferred maintenance and an undesirable property.

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