How much do you set aside for repairs each month when analysing?

12 Replies

Hello everyone, how much do you set aside for repairs each month when analyzing a property?

The property has not be bought yet, has not been seen in person, the property is just listed on a website.

This question is specifically for when you analyze a property. How much do you factor in to know if a property will cash flow before you actively pursue it... Is there a ball park you use, or specific percentages?

Thanks in advance for your response.

Probably one of the most asked questions on BP. Do a forum search for older posts to find more refined answers than mine. Information one needs before answering this question.

1) How old is the property?

2) how big is the property?

3) property type? multi family single family etc?

2) How will the house be used? Long term rental/ vacation rental?

4) Will you be rehabbing it? have any improvements been made? what and when?

If you have a newer well kept property and your occupancy is great then maintenance can be low single digits as a percentage of revenue. However, Capital improvements which are a much bigger ticket and done less frequently can easily be much higher. A lot of variables to consider.

You can estimate roof replacement, heating and air conditioning replacement etc. over time and then average it out.

With a new purchase I game out sensible estimates figuring age and usage and yearly revisits to my proforma to narrow it all down.

maintenance and capex tip: I never buy properties built before 1990...I think I got that from @j-scott

Zero, nothing, $0...

Why?, because it accomplishes nothing.  Forget percentages.

Here's an experiment for you:

1 - Assign any percentage you want out of the rent each month (use a specific rent in dollar$) for this.
2 - Write down on a sheet of paper a list of months, and next to each month have two columns.  One for each month's dollars you're taking out, and next to it a running total of it.
3 - Get an estimate of the cost to replace a roof, a furnace, a driveway, a new kitchen, and anything else you would be using this money for.
4 - Look down the second column (the cumulative number) and find out how long it would take to have saved enough in this fund to pay for, let's ay, a roof replacement.
5 - Then, think about what would happen if during this waiting period, you had a vacancy, or a different/added cost.
6 - Now ask yourself, "is the act of saving this money monthly a functional action, or an illusion"?

So, what's the answer? Get a personal or business LOC that's not connected to any property, and use that as your source of funds, instead of the method proposed.

Hey @Joe Villeneuve , I use a line of credit instead of a bank account also, but @Amandeep Singh Bassi was asking how much you set aside when analyzing a property.  Aman, I use 2 methods.  I calculate 10% for maintenance, 5% for cap ex costs, and 8% for vacancy, the other method is to judge the condition of the property and figure out from there,  If it needs a lot of work I make sure it has a minimun of $100 for month for repairs. 

I keep some funds available to me as a back up but could easily get a line of credit if needed. In my area I keep 10% for maintenance, 5% for vacancy, and 8% for capex. Of course I really only put it all in one bank account that I use to pay bills and the mortgage from. Right now I'm building up my reserves some from many properties so I'm not taking a draw from about half of my accounts but I know how much I would be taking!

Originally posted by @Jerry W. :

Hey @Joe Villeneuve, I use a line of credit instead of a bank account also, but @Amandeep Singh Bassi was asking how much you set aside when analyzing a property.  Aman, I use 2 methods.  I calculate 10% for maintenance, 5% for cap ex costs, and 8% for vacancy, the other method is to judge the condition of the property and figure out from there,  If it needs a lot of work I make sure it has a minimun of $100 for month for repairs. 

I know. My answer is still zero. My LOC does all of that for me. Holding out a percentage of my money to cover something already covered makes no sense to me. It's a lot like having to put $5k in your bank account, and leaving it there, in order to get free checking. Both cases just add to my cost, and gain me nothing in return.

 

@Amandeep Singh Bassi you can plug in whatever number you want, but it is unlikely  to match your actual expenses. Repairs are byproduct of three factors:

1. Condition of the property. How new is everything and what quality of fixtures was used? I have seen new construction where all low end parts where used and things start breaking immediately. I have had old properties with water heaters that lasted 40 years.

2. Care of the property. A bad tenant can break most anything. Put eight people in a three bedroom house and things will wear out much faster.

3. Luck. I am not a firm believer in luck, but random or rare things happen. Sometimes it a quality or workmanship issue from years ago and other times it is an act of God.

We do not set aside a specific percentage, but we do have reserves and access to funds to cover repairs. If you purchased enough properties, you would arrive at a statistical monthly percentage average repair cost over time. Still you would find some properties have no expense and others have large expenses. 

Most deal analyzers plug in 5-10% for repairs and CAPEX, so you have 10-20% of rents set aside. Then they plug in 8% for vacancy. You can end up setting aside 15-30% of gross rents for hypotheticals. It may not be a bad thing for people starting out, because it forces you into deals with better cash flow. The only risk can be higher cash flow may mean higher risk - in other words higher expenses...

Joe, thank you for replying to my post. Can I ask you how you would pay the line of credit back? Would you use the cash flow you make of the property to pay it back or do you use other funds? 

Originally posted by @Joe Villeneuve :
Originally posted by @Jerry W.:

Hey @Joe Villeneuve, I use a line of credit instead of a bank account also, but @Amandeep Singh Bassi was asking how much you set aside when analyzing a property.  Aman, I use 2 methods.  I calculate 10% for maintenance, 5% for cap ex costs, and 8% for vacancy, the other method is to judge the condition of the property and figure out from there,  If it needs a lot of work I make sure it has a minimun of $100 for month for repairs. 

I know. My answer is still zero. My LOC does all of that for me. Holding out a percentage of my money to cover something already covered makes no sense to me. It's a lot like having to put $5k in your bank account, and leaving it there, in order to get free checking. Both cases just add to my cost, and gain me nothing in return.

 

 

Hey Joe, thank you for replying. I was wondering, what would your typical reserves and access to cash look like for repairs on a house you bought for £100,000 and how would you keep a track of any repairs? This is really interesting as the only way I thought to calculate it was by assigning a percentage and deducting that each month from the monthly income 

Originally posted by @Joe Splitrock :

@Amandeep Singh Bassi you can plug in whatever number you want, but it is unlikely  to match your actual expenses. Repairs are byproduct of three factors:

1. Condition of the property. How new is everything and what quality of fixtures was used? I have seen new construction where all low end parts where used and things start breaking immediately. I have had old properties with water heaters that lasted 40 years.

2. Care of the property. A bad tenant can break most anything. Put eight people in a three bedroom house and things will wear out much faster.

3. Luck. I am not a firm believer in luck, but random or rare things happen. Sometimes it a quality or workmanship issue from years ago and other times it is an act of God.

We do not set aside a specific percentage, but we do have reserves and access to funds to cover repairs. If you purchased enough properties, you would arrive at a statistical monthly percentage average repair cost over time. Still you would find some properties have no expense and others have large expenses. 

Most deal analyzers plug in 5-10% for repairs and CAPEX, so you have 10-20% of rents set aside. Then they plug in 8% for vacancy. You can end up setting aside 15-30% of gross rents for hypotheticals. It may not be a bad thing for people starting out, because it forces you into deals with better cash flow. The only risk can be higher cash flow may mean higher risk - in other words higher expenses...

 

Hey Jerry, thank you so much for answering the root of my question. I'm really interested to learn more about a line of credit, how would you pay that off? By the cash flow you make every month or by using a different source to pay it back?

Originally posted by @Jerry W. :

Hey @Joe Villeneuve , I use a line of credit instead of a bank account also, but @Amandeep Singh Bassi was asking how much you set aside when analyzing a property.  Aman, I use 2 methods.  I calculate 10% for maintenance, 5% for cap ex costs, and 8% for vacancy, the other method is to judge the condition of the property and figure out from there,  If it needs a lot of work I make sure it has a minimun of $100 for month for repairs. 

 

Originally posted by @Amandeep Singh Bassi :
Joe, thank you for replying to my post. Can I ask you how you would pay the line of credit back? Would you use the cash flow you make of the property to pay it back or do you use other funds? 

Originally posted by @Joe Villeneuve:
Originally posted by @Jerry W.:

Hey @Joe Villeneuve, I use a line of credit instead of a bank account also, but @Amandeep Singh Bassi was asking how much you set aside when analyzing a property.  Aman, I use 2 methods.  I calculate 10% for maintenance, 5% for cap ex costs, and 8% for vacancy, the other method is to judge the condition of the property and figure out from there,  If it needs a lot of work I make sure it has a minimun of $100 for month for repairs. 

I know. My answer is still zero. My LOC does all of that for me. Holding out a percentage of my money to cover something already covered makes no sense to me. It's a lot like having to put $5k in your bank account, and leaving it there, in order to get free checking. Both cases just add to my cost, and gain me nothing in return.

 


 

Cash flow.

 

Originally posted by @Amandeep Singh Bassi :
Hey Joe, thank you for replying. I was wondering, what would your typical reserves and access to cash look like for repairs on a house you bought for £100,000 and how would you keep a track of any repairs? This is really interesting as the only way I thought to calculate it was by assigning a percentage and deducting that each month from the monthly income 

Originally posted by @Joe Splitrock:

@Amandeep Singh Bassi you can plug in whatever number you want, but it is unlikely  to match your actual expenses. Repairs are byproduct of three factors:

1. Condition of the property. How new is everything and what quality of fixtures was used? I have seen new construction where all low end parts where used and things start breaking immediately. I have had old properties with water heaters that lasted 40 years.

2. Care of the property. A bad tenant can break most anything. Put eight people in a three bedroom house and things will wear out much faster.

3. Luck. I am not a firm believer in luck, but random or rare things happen. Sometimes it a quality or workmanship issue from years ago and other times it is an act of God.

We do not set aside a specific percentage, but we do have reserves and access to funds to cover repairs. If you purchased enough properties, you would arrive at a statistical monthly percentage average repair cost over time. Still you would find some properties have no expense and others have large expenses. 

Most deal analyzers plug in 5-10% for repairs and CAPEX, so you have 10-20% of rents set aside. Then they plug in 8% for vacancy. You can end up setting aside 15-30% of gross rents for hypotheticals. It may not be a bad thing for people starting out, because it forces you into deals with better cash flow. The only risk can be higher cash flow may mean higher risk - in other words higher expenses...

 

 Depends on the condition of the properties, and how many.

Joe, thanks again for the quick reply. You have been a tremendous help Sir

Originally posted by @Joe Villeneuve :
Originally posted by @Amandeep Singh Bassi:
Hey Joe, thank you for replying. I was wondering, what would your typical reserves and access to cash look like for repairs on a house you bought for £100,000 and how would you keep a track of any repairs? This is really interesting as the only way I thought to calculate it was by assigning a percentage and deducting that each month from the monthly income 

Originally posted by @Joe Splitrock:

@Amandeep Singh Bassi you can plug in whatever number you want, but it is unlikely  to match your actual expenses. Repairs are byproduct of three factors:

1. Condition of the property. How new is everything and what quality of fixtures was used? I have seen new construction where all low end parts where used and things start breaking immediately. I have had old properties with water heaters that lasted 40 years.

2. Care of the property. A bad tenant can break most anything. Put eight people in a three bedroom house and things will wear out much faster.

3. Luck. I am not a firm believer in luck, but random or rare things happen. Sometimes it a quality or workmanship issue from years ago and other times it is an act of God.

We do not set aside a specific percentage, but we do have reserves and access to funds to cover repairs. If you purchased enough properties, you would arrive at a statistical monthly percentage average repair cost over time. Still you would find some properties have no expense and others have large expenses. 

Most deal analyzers plug in 5-10% for repairs and CAPEX, so you have 10-20% of rents set aside. Then they plug in 8% for vacancy. You can end up setting aside 15-30% of gross rents for hypotheticals. It may not be a bad thing for people starting out, because it forces you into deals with better cash flow. The only risk can be higher cash flow may mean higher risk - in other words higher expenses...

 

 Depends on the condition of the properties, and how many.

 

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