Cash Flow and Setting Aside Reserves

1 Reply

For buy-n-holds, if you take a portion of your collected monthly rent to place into reserve accounts for items like future vacancy, repairs, cap ex, etc., do you NOT include that money in your final earned cash flow number?  It's technically earmarked for a future expense, so I would assume it is not included?

My multifamily has a solid NOI as of late, but since I set aside such reserves, the cash flow figures aren't as awesome. Am I making the correct assumptions?

@Ryan Moore - Vacancy should not be part of your reserve as it is not an 'expense' but foregone / unrealized income. As long as your gross rents cover all the expenses, that is your NOI.

The reserve 'should be' independent of the income the property but the reality is that most owners simply don't have the discipline or the deep enough pockets to do that.

Reserve amount is the a calculation of how long before you have to replace 'big' ticket items at a property (e.g. Boiler, Roof, etc). Alternatively, you make repairs until the item becomes non-fixable.

Some owners / managers include AC unit, Appliances, Common Area (Carpet, Paint), Exterior upgrades, etc. etc. How far you drive this down depends how proactive you want to be vs. reactive to something failing.


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