How do you determine how much to set aside for expenses?

2 Replies

When evaluating properties, I try to use the 10% of rent for maintenance, cap-ex, management, and vacancy. So 40% of rent set aside total to be on the safe side, but this obviously is very generic. Obviously a house built in 1980 in the good part of town will have different expenses then a 1940 house in the C- part of town.

What figures have you found generally work for you and for what kind of houses? Will you only put aside 5% for maintenance, cap-ex, and vacancy for a 1980's house in a good neighborhood. Do you base your it off of a specific cost or do you find percentages of rent or purchase price work best?

@Jacob Barnhart It depends on your tenant class, property type, and amount of upfront rehab. Once you get a feel for properties in your area and what the costs of repairs are you can fine tune it. Labor costs are what add up and vary from state to state. You can also keep a reserve of a few thousand if you think you have cut your budget to close. 

I prefer to do more rehab/repair than needed when I buy the property and build those costs into the deal so repairs, at least in the short term are less. I also remove/replace the problem items, like garbage disposals, ice makers, old school toilet flappers.

Generally you should have set aside the equilivant of 6 mounts rent as a contingency fund for not only repairs but also unplanned vacancies. When you use any portion of it you immediately rebuild it from your income. 

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