How do you budget for your rentals?

[Jeremy Clarke]

I was talking to a friend last week and he is interested in buying his first investment property. I have a couple and he started asking me how I budget for those properties in case of emergencies. It made me wonder, "what do other people do"? So I'm asking you BP community. How much money do you set aside for your rentals in case something goes wrong? Is it a dollar amount? A percentage of what the house is worth? Any thoughts are appreciated!

[Andrew Johnson]

Jeremy Clarke You'll get a ton of opinions on this one. I think one of the metrics I hear most often is having reserves of 6 months just sitting on the bank or maybe 3-month CDs. Basically, something that is pretty liquid. My unscientific method is to look out 5 years and see what cap-ex issues could happen during that timeframe. If a roof is 5 years old it's not likely you'll have to do a roof replace. If an HVAC system is 5 years old there's a chance it goes south in the next 5 years. And since I own a bunch of units it's almost guaranteed that more than a couple (in this scenario) will have HVACs die on me. The reserves you'd be prudent to carry are also different if you have a 1920's property with 1920's plumbing vs. a 2010 build. The reason for my rationale is that my portfolio can self-support vacancy, broken hot water heaters, carpet replacement, etc. on a monthly basis. What it can't support is a new roof or 2 full HVAC replacements. So your need for reserves might also depend on if you're cash-flowing $100/month or $1000/month. Anyway, hope the perspective helps.