What do you budget for reserves and CapEx?

58 Replies

Reading another thread, @Nathan G. said "I suspect it's in the neighborhood of 20% (of landlords) that hold reserves and even fewer that hold the proper amount."

I see a LOT of people asking how to start investing with no money (and usually bad credit) and that makes me cringe, knowing that one big repair could wipe them out.

@Scott Trench said that when he bought his first Duplex, he put $10,000 into a bank account to cover unexpected expenses. When he bought a second duplex, he put in another $10,000. When he bought his four-plex, he didn't add additional funds, as he already had $20,000 in his reserve fund and a stable job that paid well. This makes sense, and if you have an excess of money every month after expenses, the reserves don't need to be quite so well established.

So how much do you hold in reserves? What do you budget for CapEx every month?

I'm assuming it would take a year or two to have saved enough with those % to have a safe cushion? If it's a new property and you've only had it rented for a couple of months and it needs let's say $400 for a plumbing repair that would put you in the negative for the repair fund. 

I'm new to this, where do you keep the funds for each house? If you have 20 houses. Do you have 20 different bank accounts? 

0. I figured out how to buy the properties, I‘ll figure out how to maintain the properties. I do try to do a full rehab initially. As I keep buying more properties, the cash flow monthly grows too, that helps. Granted, I‘m not buying apartment complexes or using leverage currently.

Originally posted by @Jonathan R. :

0. I figured out how to buy the properties, I‘ll figure out how to maintain the properties. I do try to do a full rehab initially. As I keep buying more properties, the cash flow monthly grows too, that helps. 

 How many properties/units do you have? How many cycles have you been through? 

Originally posted by @Syed H. :
Originally posted by @Jonathan R.:

0. I figured out how to buy the properties, I‘ll figure out how to maintain the properties. I do try to do a full rehab initially. As I keep buying more properties, the cash flow monthly grows too, that helps. 

 How many properties/units do you have? How many cycles have you been through? 

 5. Low price point homes. If one burns down I‘ll buy another one.

Updated 5 months ago

*$500 per door per month

Updated 5 months ago

Here is kind of how I‘m justifying this. If I buy a property all in that returns my entire investment within 4 years, and an ac unit, furnace or roof currently costs me about $2500, just on that initial investment (1 unit has grown to 4 in 16 years which happens to be the approximate life of the expense) I‘ll have cashflow monthly of $2000 ($500 per month) on the low side to cover that repair that month. The key for me is to keep buying. If my cost to maintain the property gets higher over the years vs my cashflow or I stop buying, more reserves would make sense.

The percentages definitely vary between markets and condition of the property. I still run 10/10/10% for my properties. My logic behind this is, if I can stay above a 4.5-5% cap with a 10/10/10 it's just extra icing on the cake for the duration of the hold. 

I would like to hear how others estimate their percentages.. Elaborate on how you come up with a certain percentage for each expense.  

All of it, 100%

I have a W-2 job that pays the way, so all the rent collected goes direct deposit into an account reserved only for my properties.

Great question @Mindy Jensen ! While I am a relative newbie, I am a nerd and a numbers guy and this is a topic that always catches my attention. 

When I analyze my  rental properties (using the BiggerPockets Rental Property Calculator, obviously) I approach it much like @Scott Trench . I will add in $10K of additional rehab dollars to fund a CapEx/Repairs account. I will run my numbers with and without this allocation, but including this will result in the most conservative approach. I will then add 15% of monthly rent into this account. If I don't end up needing the initial $10K, all the better. Of course, with my first property, I needed a hot water tank within the first 4 months and I had the funds set aside to cover this with no issue.

The part of this discussion that frustrates me is how many investors throw a % number blindly at things like CapEx, Repairs, Vacancy, etc. To get an accurate sense of the numbers, there needs to be a little more thought. 15% of the total rent I receive for my triplex in New Hampshire is very different than 15% of the rent for a triplex in Boston, or Wyoming, or Colorado. However, a hot water heater costs what a hot water heater costs. Sure repair costs will vary some based on location, but these rule of thumb percentages do not apply evenly across the board. My 15% may be enough to cover repairs and CapEx, but it may not be enough for someone else. For a quick view of a property, I aim to be conservative. 15% total for CapEx/Repairs, 8.5% for vacancy (1 month vacant). If the numbers work out using these assumptions, I can move forward with a relative amount of confidence.

I am looking forward to reading the other posts on this thread... 

It depends on the condition of the property.

As a rule of thumb, for a well maintained property with mechanicals & structural components NOT nearing the end of their lifespan, I budget 10% for maintenance in the specific market I invest in. This 10% is relatively high compared to other, similarly priced markets bc I do invest in a market that has rather high rents vs. the property's value. 

Truly, the best method for the over analytical, is to segregate the cost of replacement vs. remaining lifespan of each component of the property & find out how much need be budgeted yearly until replacement of that component comes due. 

Ex: if you expect a furnace to last 15 years with an 1500$ replacement cost, and yours is 10 years old when you buy the property, then you should have a total of  $1500 reserved in the next 5 years. This breaks down to $300/yr, or $25/mo. After that furnaced is replaced, you should recalculate the budget. If you new furnace is also going to last 15 years with a 1500 replacement cost then you only need budget $100/yr, or $8.33/mo.  This is a FAR more accurate method of maint/capex estimation than the good ole' pro-forma 10-15% :)

Now if you buy a property that's got some older components, you should look at your short term maintenance budget vs. your long term maintenance budget. Note that once you "stabilize" a property... replace the older stuff in the first couple of years... then your average operating costs are going to go down significantly. That $25/mo furnace budget need not worry you, it's going to drop down to $8/mo after your first 5 years. And your rents will likely increase :)

$0.00. I have enough properties that I bought right for cash. I have enough income coming in every month to handle a roof or HVAC or what ever life throws at me. I do let cash build up so that I can pay cash for that next hot deal.

Great topic Mindy, because I see #'s that are all over the place. I often wonder when I hear someone claiming to cash flow $400 or $500 per month, is that after setting aside money for capex and repairs and vacancies, or is that before figuring those in? So it's hard for a newbie to gauge.

Also, when looking at places like Roofstock or some turnkey companies, it seems like they are only projecting 5 or 6% for capex. Maybe I'm ultra conservative, but $600 or $700/year on a $1000/mo rent seems way too low. 

For our first property we're setting aside 8% for vacancy, 8% for repairs, and 12% for capex on a $1350 rent. This is considering that we just installed new flooring, new fridge, new dishwasher, new AC unit and new hot water. We anticipate a new roof in the next 10 years, and a furnace in the next 5, windows in the next 10. Then there are the unknowns. So between the 8% for repairs and 12% for capex, that's $3240 per year, and $32,400 over a 10 year period for paint, repairs, capex, which I hope is more than sufficient to handle most of the major fixes we may run into. If we've underestimated, we'll adjust our #'s. If we've overestimated, then that's money left for the next property. 

@Mindy Jensen I use 5% R&M, 10% CapX, and 8% Vacancy. I also started out with $1500 set aside to cover any repairs/expenses that occurred before I'd saved up my in those categories, so far repairs have been much lower than 5%, mostly due to my home warranty, which is basically just a $75 fee whenever I have them repair something (which isn't often).

@Mindy Jensen thanks for the nod.

This topic is very important for beginners because almost every purchase has some hidden costs. Spending your last dime on a new property is a bad, bad idea.

How much reserve should you have? That depends on:

1. Condition of the property;

2. Overall strength of your portfolio;

3. Personal finances.

If you are making $40,000 a year and living paycheck-to-paycheck, it's a very bad idea to spend your last penny to buy an investment property. Odds are very good that a major expense or a bad tenant will eat your lunch and your wealth-building plans will go out the window.

If you are a cardiologist making $200,000 a year with no debt, you can probably replace the roof of a house without batting an eye.

If you are an investor with ten properties each cash-flowing $250 a month, you can probably afford to write a check for a new roof without digging into reserves.

Everyone needs to measure their own portfolio and personal situation. I have 20 units and keep a reserve of $10,000. That's enough to cover a couple big hits and I can cover the rest with monthly cash flow, personal income, or even a credit card in an emergency.

The first investment I bought cost me $6,700 at the closing table. Within four months, I had to pour another $10,000 into it for an unidentified sewer problem followed by an HOA special assessment that my REALTOR failed to tell me about. If I didn't have additional savings, it could have really put me in a bind and possibly caused me to lose the property (or my fairly new wife).

Buy smart!

As soon as you close, something needs repaired. It's a Real Estate Law. The cost of that repair is inversely proportionate to how much you have in reserves. Nothing? You're looking at a new roof, AC, furnace or heck, maybe even all three!

Tons in reserves? You need a new outlet cover.

My average is 5% for each but it varies based on the condition of property and vacancy for an area. I have one area where if you go vacant toward winter you're stuck until spring, most of the others are maybe a month every few years. 4-5% on the fast turners, 8% on the slow. A brand new house, I'd probably set R&M low, on and older one higher. CapEx go 10% figuring it is money I can spend somewhere if I don't need it for one of the existing houses.

I agree that you need to make sure you have some way to make repairs when you first buy. I have a couple houses that are getting hot water heaters 6 months after we bought. Everything about these houses are great except that. Of course we knew that before we closed. We bought one that needed a new roof as soon as we closed. We had to rush before winter really set in but that is why we got a killer deal on it.  Just the other day we had to put a new bathtub, plumbing and shower walls in unexpectedly. Not the tenants fault, we just weren't aware that the tub had a small crack or something that suddenly caused a huge crack when he leaned on the edge to get his kid out.

I generally try to keep at least 10k minimum per house depending on age, size and location. We also do a lot of our own work so have lower costs than some. The more houses you have, the smaller you can go on the per house amount since the odds are, you won't be replacing something major on all of them within the same few months.

We just purchased a MFH and spent about 15% of the purchase price on CAP EX rehab costs, but we baked that into our offer. @Mindy Jensen is right the bigger pockets you have the easier it is to absorb the unexpected.  

Our bonus is that we significantly increased the curb appeal and value of the investment with our little rehab.  Had the previous owner done this, we never could have picked up this property.

Seems peoples numbers are pretty close at right around 25%, give or take, to cover cap ex, maintenance and vacancy. I am one months rent per year, per unit for each at 8.33%, a total of 25% per year. I am still building my account so for now, I add an additional 8.33% as a conservative buffer. I came to these numbers by doing rough vacancy, reserves and maintenance studies - pretty much ballpark numbers.

A few people mentioned how it depends on the property and I agree. Each property needs a reserve study to determine the existing components, frequency of replacements and projected costs. That is the precise play.

A few other people mentioned they keep enough around for any hit and I agree with that too.

I think the reserve study is a better option when considering a purchase (or marketing a sale). While conversely, the keep enough for any hit is more practical when wanting to use as much capital as possible to buy more property.

Good topic.

@Mindy Jensen

I listen to the podcast, but learned to think about the reserves in one of the free webinars. Anyway, I’m just starting out and decided the following, 8% for vacancy (expecting one month per year,) and 10% repair and maintenance.

I want to build good reserves so I don’t have stress. Maybe one day I’ll hit an amount that I no longer contribute. I figure I’ll know it when I get there.

Where do you all keep the money? If you have 25 rentals do you have separate bank accounts for each? How do you track what money is set aside for each property? 

@Mindy, I’m putting $2000/month into reserves at this moment. I’ve spent the last 4 years growing, renovating, and handling any repairs out of cash flow. Overall luck was on my side. But I feel now that I’m a little bigger I need to secure a good size account to cover emergencies. $50k is my goal. I should be there by years end.

@Mindy Jensen

We have separate accts for each of our properties. Rent goes in, expenses go out, the rest stays in the acts for capex and whatever else is needed.

Even ignoring regional differences, there is no magic rule of thumb percentage for reserves. If your new acquisition needs re-roofing soon, the roof alone could consume much of the rental income. The project needs to be broken down into components with cost and remaining life assigned to each component. After the component inventory is established, a reserve funding plan can be generated. Your risk tolerance and financial resource depth will determine how much should be reserved. It is also possible that financing may also play into the reserve funding equation. The best answer is a Reserve Study.

@Mindy Jensen  I "officially" set aside 3% vacancy, 5% maintenance, 5% capex, 7% management. However, this comes with many caveats. 

  1. I self manage. 
  2. When purchasing my duplexes I have been able to get the seller to buy a 12 month home owners warranty, so I have that first year to really put away money in case of a large expense. 
  3. I have also negotiated things such as new HVAC, hot water heaters, dish washers, egress window, roughed in plumbing for a basement, etc. prior to close. Now, that may mean I paid market rate on one duplex, but I get to roll such costs into the mortgage instead of paying cash for an upgrade. 
  4. My B class properties are in high demand in a growing community, so vacancy has not been an issue, except when I purchased an empty duplex in a cold, cold December. And even then I was able to obtain a short term tenant that was relocating, and he paid a nice premium to cover all overhead for a couple months.
  5. Last, and most important of all, I have a very stable and well paying W2 job, so in all reality I have been putting away 100% of my profits for retirement/new acquisitions. 
  6. I keep about $10k cash for immediate repairs and put the rest into my Vanguard brokerage account (easily accessible but still earning more than a savings account). 

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