How do you plan for costly maintenance??

Question

Todd Plambeck · Answer

You need to accrue money for those capital expenses.  Say the roof will last 20 years and costs $10,000.  That's $500 a year or $42 a month.  That's assuming the roof has 20 years left in it.  If it only has 10 years then you'd need to double that for 10 years to $84 a month.  Then after it's been replaced recalculate the amount you are accruing based on the cost and longevity of the new roof.  Using the same numbers you could drop it back to $42 a month.  Same for HVAC, water heaters, paint, appliances, etc, etc.  All those amounts go into you capital reserves account.

Lynn McGeein · Answer

We have an emergency fund, approx 3-6 times monthly rents built up for all units pooled.   We had 3 heat systems and 2 water heaters replaced in 12 months with only 6 units.  That year made us very happy we had the fund as it went quickly.  We do have credit cards for back-up while we rebuild the fund.  We've also used the fund for reserve requirements and down payment funds on occasion, but lately it's for turnovers and repairs.

Ravi P. · Answer

Brandon,A new roof would not be considered maintenance. It would be a capital expense.  The ideal landlord would typically prepare for a new roof by setting aside a percentage of Revenue/ Rental Income in a Replacement Reserves Fund. These funds should be set aside for these large expenses. As for the percentage it varies depending on a few factors such as, if a HOA is in place, number of units in a MFH, age and condition of property and quality of tenants can be a factor. Everything has a useful life, becoming familar with this will help in planning. Banks also require you to budget for these items when submitting a proforma statement. I can assure you that most landlords don't follow this practice. I am guilty of this as well.  I own 5 condos with HOA and have good tenants. I also have good credit and CCs with high available balances.

Marcia Maynard · Answer

In addition to keeping current with regular maintenance, know the estimated life span of certain building components and that of appliances too. Anticipate the regular replacement of key items and save for it. Also maintain sufficient reserves and sufficient insurance for the unexpected.

Deanna McCormick · Answer

It's the you know it will happen stuff that you plan ahead for it's the OMG stuff that eats your pocket book up. We had a water main break and not covered by insurance , was exterior and cost around 5 K to get taken care of.. I know when the roofs going to be needed just hoping for a hail storm... it's the OMG stuff that hurts.

Percentage of monthly rents go into reserve just like a water bill or electric bill. Set it aside before you pay yourself.

Zachary C. · Answer

@Brandon Benifield,

Before buying my first property I interviewed my property manager, and I discussed issues like this. Besides a savvy investor these people are great to discuss these issues with because they see tons of rental properties in your area. In the end though we calculated it into our plan. We decided to keep a reserve fund of 5K out of our total budget for the first house as an emergency fund, so to speak. We planned on that covering what would need while getting the first renter in and any maintenance the rent or lack of didn't cover in the beginning. Once you start cash flowing you can take a part of that and stick it back into the reserve if you had to tap into it. If, after you start getting some experience, it seems like your original reserve might not be enough for whatever reason (you have more houses and more chance of 2 things happening at once, drastic changes in the economy, etc.) then you can direct as much cash flow as possible into the reserve fund until it grows to an amount you deem sufficient. So if reserve fund is lower than what you want direct cash flow there until it reaches what you want. When reserves are where you want them direct cash flow to something else, like your next deal.

How do you plan for costly maintenance??

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