Are you investing you CAPEX and Vacancy funds?

Question

I am about to close on my first 2 duplexes this month. In my analysis I budget for vacancy and capital expenses (which I believe most of you are doing) and it comes to about $10k annually for each property.

My question is, what are you doing with those funds in the absence of a vacancy or capital expense?

It feels like a waste to allow the funds to be sitting in savings account with near-zero interest. My thoughts are that these could be placed in some semi-liquid investment vehical and drawn down when need. If the capex funds are needed immediately, I could always float the downpayment on the job with a credit card.

If you are doing something other than letting it sit in a savings account, what are you doing with the funds? What challenges/successes have you had?

Nathan Gesner · Answer

This is not an exact science. It depends on your financial strength, the quality of the property, how many properties you own, etc.

I like to start with one major expense and three months of vacancy. Imagine if you had one single-family home. The tenant fails to pay their last month's rent and leaves the place needing new flooring and paint. It will take two months to turn it around and get it rented. That's three months of mortgage and utilities, the cost of flooring, and the cost of painting. That's a pretty common scenario and could cost you $10,000 - $15,000 so that would be a good starting point for your reserve.

But there's more!

What if you're a cardiologist with no debt and making $250,000 a year? You could probably afford $20,000 without much impact on your personal budget. If you're a single mom with student loans, a car payment, and living paycheck-to-paycheck, then $20,000 would be devastating and a reserve is critical.

What if you have an apartment complex with 20 units? Do you save three months of vacancy for each unit and $50,000 for the roof replacement? That would be around $90,000 sitting in a savings account! At this point, I would recommend having a line of credit to cover these things so you don't have money sitting in the bank doing nothing when it could be put to work.

I have 33 units, no debt except for mortgages, and excellent income. I can pay for all my problems using the cashflow from my current rentals. I also have a $175,000 line of credit at the ready if something catastrophic happened. A reserve is unnecessary, but I still keep around $15,000 - $20,000 in my account.

The point is, you should sit down and assess your personal finances to determine what the worst-case scenario may look like, how much you would need to cover it without impacting your life, and whether you will need to build a reserve.

Rafael Norat · Answer

@Jason DeMauro

Hey Jason and great planning! If you have a financial advisor on your team, game plan with him or her and see if there is a semi-liquid vehicle these funds can be placed in. Obviously you don't want to be caught with a need where you can't pull these funds at that time. However, its probably best to have these funds set aside your 1st year untouched though to at least have that time to gauge how your properties are actually performing. If after that 1st year you see a surplus in Capex and Vac buckets, then maybe pivot and seek that vehicle. Its similar to when lender escrows your tax an insurance funds and then adjust quarterly or yearly based on the actual needs. Hope that help! Reach out any questions. Can you recommend you a good financial advisor that I work with.

Are you investing you CAPEX and Vacancy funds?

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