What do you budget for reserves and CapEx?
Mindy JensenPro Member
BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votesWhat do you budget for reserves and CapEx?
Most Popular Reply
Rental Property Investor · Sacramento, CA · Member since 2015 · 1k+ posts · 893 votes
7yIt 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 :)
58 Replies
- 7yJohn MorganPro MemberRental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
I only have 6 SFRs and got torched last summer on random things breaking. My rule of thumb was to have 10k for each property sitting in savings for the unexpected. I only had 50k and was getting cocky since everything had been running smooth for awhile. However, I had 70k worth of unexpected things breaking on my properties within a 5 month period. I got caught with my pants down and burned through all my 50k cash in what felt like a nano second. My advice is to have at least 10k per property! If you don’t, just make sure you have easy access to borrow some coin to pay off the unexpected. And trust me, Murphy will show up on you once in awhile and you better be ready to pay up.
- Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes7y
@Mindy Jensen What works for me is to burn 50 dollar bills in each corner of all new properties, within 1 hour of taking ownership. It's my version of sage smudging. Then I set aside $1million per square foot to handle unexpected Capex, maintenance and repairs. It's never enough, but I can always sell my plasma if I need to. Owning property is expensive.
- 7yBjorn AhlbladPro MemberInvestor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
I bought a 12 unit 18 months ago. I put 25k in the LLC account from which I pay everything and deposit rents etc. There is over 100k accumulated in that account; plenty for any regular and unforeseen expenses, capex, vacancies and anything else.
My duplexes on the other hand are appreciating really well; but that means nothing unless I sell; so the way I measure the duplexes are breaking even, and not much more. They are in a 1031x so I can't wait to find another 10-20 unit building.
- Rental Property Investor · Auburndale, FL · Member since 2018 · 58 posts · 68 votes7y
When analyzing a new acquisition, I've used 5% vacancy, 5% CAPEX and 5% R&M. As
@Mindy Jensen stated, the Real Estate Law is something that will happen post-close when reserves are too little. My last acquisition had just this situation when I found the plumbing beneath the slab of the duplex had been broken for some time and required a re-pipe from the shared kitchen drain line.
To better support the initial cashflows to start-up after acquisition, I've set aside an additional 6-months debt service to fund post-closing operating expenses. Budgeting for cash reserves can be just as important as the cashflow projections in a pro forma analysis.
- Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes7y
@John Morgan Dude, how do you tell us you burned through $70k on SFR repairs and not tell us how?! When you said $50k in reserves I thought; "no way". Now I need to know how that happened. I'm thinking tornado or a flood. 6 furnaces went out? 5 septic systems? I literally can't imagine how you spent $70k in a few months.
- Investor · Youngstown, OH · Member since 2017 · 2k+ posts · 2k+ votes7y
10% for repairs, PM, and vacancy (so that's 30% total, not 10% for all 3) and 5% for CapEx. We buy turnkey to keep costs low.
- San Diego, CA · Member since 2018 · 10 posts · 5 votes7y
@NicoleHeasley,
Thanks for sharing! So it seems that with repairs, MX, and vacancy you are sitting at 25%, which is what most people end up close to.
My question for you is: with those metrics, what type of cash flow per unit and Cash in Cash return are you looking to see before you buy a property?
To me, if someone is using 10%/10%/10% and looking for a 5% ROI, that is almost the same as someone else using 5%/5%/5% and seeing 13% ROI for example.
Anyone else chime in please!
- Investor · Youngstown, OH · Member since 2017 · 2k+ posts · 2k+ votes7y
@Account Closed I'm happy with anything over $100/month.
- Insurance Agent · Thornton, CO · Member since 2018 · 75 posts · 51 votes7y
Question for you experienced folks who use PM's: I understand adding in 10% (or whatever it is) for monthly management fees when running cash flows. However there are also leasing fees that go on top of those, which seems to be anywhere from 50% to 100% of one months rent. Is everyone running those #'s into their cash flow calculations? Just want to make sure I'm not missing something.
- Rental Property Investor · Lindsborg, KS · Member since 2019 · 25 posts · 14 votes7y
Originally posted by @John Morgan:
I only have 6 SFRs and got torched last summer...
So what are you doing now? Because my plan was to build up $10k/property until I read this post.
- Rental Property Investor · Lindsborg, KS · Member since 2019 · 25 posts · 14 votes7y
This might be the wrong place for this, but I'm a noobie and am trying to make a list of capex items to fill out for each of my prospective properties. Am I missing any other big ticket items? Also, do these numbers seem ok for estimated lifespans?
CapEx Items Est. Lifespan Roof 30 years HVAC 15 years Siding/Exterior Paint 20 years Deck/Driveway Varies Refrigerator 15 years Stove 15 years Dishwasher 10 years - San Diego, CA · Member since 2018 · 10 posts · 5 votes7y
Gotcha, thanks!
- Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes7y
Many clients I work with seem to grab a percentage that they heard (on here) and run with it blindly. The problem in doing that is prices vary widely in different areas. Quick example showing 10% reserve:
A - Cheap rental, $500 rent per month, $50 per month for CapEx.
B - Expensive rental, $5,000 rent per month, $500 per month for CapEx.
Lets say a water heater goes out and needs to be replaced. Sure, labor may be more expensive near unit B, it may also need a larger water heater (may not) but it typically won't cost 10 times more to replace the water heater for unit B. It also won't deplete the reserves as quickly.
We can throw any numbers at it but the cheaper properties tend to need larger reserve accounts. A roof or a larger item can quickly wipe out a year or two of cash flow so it also has to be planned out a lot better. There are a couple of areas that I have been looking at that are cheaper in price. They are older houses, they don't seem to appreciate much, but on the cover they have great cash flow. You have to nail down CapEx on these properties or it will not work. I don't know much about the popular turnkey areas but I think this is where many investors are going to get surprised. Just because the house is cheap doesn't mean the costs are proportionately cheaper.
Personally I try and estimate the replacement costs and useful lives left on the major components (roof, furnace, water heater, windows, etc) and break it down to a monthly amount. For example if a roof costs $12k and has 10 years left I better reserve $100 per month for the roof (12,000 / 10 years = $1,200 per year / 12 months = $100 per month). I run this calc for all of the larger items and come to a monthly CapEx number. It is always higher than I want it to be but I fell comfortable knowing I made my best estimate.
- Real Estate Agent · Southington, CT · Member since 2008 · 5k+ posts · 3k+ votes7y
Since we take care of all of the deferred maintenance issues upfront when we purchase a rental (we BRRRR rentals we keep) we set aside 5% for repairs, 5% for capex, and 5% for vacancy and that has worked for us so far.
I feel the same way @Mindy Jensen does when I see people looking to scale their investing business with little or no reserves. My wife and I worked 2-3 jobs for the better part for a decade living below our means before we start deploying some of what we saved into real estate investing ventures and scaling to where we are now. There is a lot of putting the cart before the horse from that perspective from what I see on the forums. Couldn't agree more.
- Member since 2019 · 3 posts · 0 votes7y
I invest in SFR under $250k per home. I keep $7000/door in reserves available. When CAPEX occurs, I replenish. I have not been burned with this set up yet, but as I tend to over analyze situations, I do have a HELOC tied to a rental just in case I need extra $.
- Investor · Youngstown, OH · Member since 2017 · 2k+ posts · 2k+ votes7y
@Ken Maddis I don't, but you should.
- BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes7y
Originally posted by @Steve K.:
@Mindy Jensen What works for me is to burn 50 dollar bills in each corner of all new properties, within 1 hour of taking ownership. It's my version of sage smudging. Then I set aside $1million per square foot to handle unexpected Capex, maintenance and repairs. It's never enough, but I can always sell my plasma if I need to. Owning property is expensive.
Owning property IN BOULDER is expensive.
- Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes7y
Originally posted by @Mindy Jensen:
Originally posted by @Steve K.:
@Mindy Jensen What works for me is to burn 50 dollar bills in each corner of all new properties, within 1 hour of taking ownership. It's my version of sage smudging. Then I set aside $1million per square foot to handle unexpected Capex, maintenance and repairs. It's never enough, but I can always sell my plasma if I need to. Owning property is expensive.
Owning property IN BOULDER is expensive.
Yes that's true, that's why I substitute 5's for 50's when I'm smudging my Longmont properties, and only allocate $500k per square foot for Capex, plus my first born for repairs.
In all seriousness though to address your post: perhaps the biggest mistake I see people making on here is using percentages or other rules of thumb instead of crunching the actual numbers specific to a property. It's especially dangerous when using a percentage of a low rent amount. If gross rent is anything less than say $1,000/mo. I'd be afraid even 100% of that is not nearly enough to meet the baseline cost to maintain a property, especially the type of inexpensive property that "cash flows" with $1,000/mo. rent. An expected $200/month cash flow can turn into a big hole that takes years to crawl out of very quickly if a couple major Capex events occur simultaneously, which thanks to Murphy's law they always do.
In my opinion the way to do it is to total up the big ticket items that may need to be addressed during the intended hold period, for example if you're planning to hold for ten years and the property is already 50 years old and in rough shape it might need 1 roof at $10k, 2 water heaters at $5k, new furnace $8k, sewer line $15k, appliances twice at $12k, driveway repaved at $9k, Kitchen and bath rehab at $20k... Let's say the total is $80k, divide that by 120 months= $666/mo. (wow, totally unintended ominous number!), plus your normal repairs, maintenance and whatever other miscellaneous **** that hits the fan of course. I've read it costs an average of $1,200/mo. to maintain a home. It's probably a lot more than most people expect which is why it's hard to make any money on inexpensive property with rent less than $1,000/mo. Literally all of that and more, most likely A LOT more, is going to get devoured by Capex over time.
I allocate $20k extra for each property when I purchase (on top of any rehab budget, and I build it into the sales price when I'm running my financial analysis, side note these are MF properties 3 units and bigger). I do this just because in my experience when I take on new properties I like to fix things. Generally I find at least some unexpected deferred maintenance type stuff that the seller didn't address, the type of thing that is better to take care of now rather than let it get worse and more expensive to deal with later. Then as far as allocating for Capex I use something like the above method, custom for each property, and have plenty of reserves held in mutual funds so I don't become an undercapitalized deadbeat landlord that can't afford to fix things or pay the mortgage when a furnace and a sewer line decide to call it quits at the same time, which just happened to me at the beginning of this year.
- Investor · Wichita, KS · Member since 2017 · 584 posts · 813 votes7y
Originally posted by @Steve K.:
Originally posted by @Mindy Jensen:
Originally posted by @Steve K.:
@Mindy Jensen What works for me is to burn 50 dollar bills in each corner of all new properties, within 1 hour of taking ownership. It's my version of sage smudging. Then I set aside $1million per square foot to handle unexpected Capex, maintenance and repairs. It's never enough, but I can always sell my plasma if I need to. Owning property is expensive.
Owning property IN BOULDER is expensive.
Yes that's true, that's why I substitute 5's for 50's when I'm smudging my Longmont properties, and only allocate $500k per square foot for Capex, plus my first born for repairs.
In all seriousness though to address your post: perhaps the biggest mistake I see people making on here is using percentages or other rules of thumb instead of crunching the actual numbers specific to a property. It's especially dangerous when using a percentage of a low rent amount. If gross rent is anything less than say $1,000/mo. I'd be afraid even 100% of that is not nearly enough to meet the baseline cost to maintain a property, especially the type of inexpensive property that "cash flows" with $1,000/mo. rent. An expected $200/month cash flow can turn into a big hole that takes years to crawl out of very quickly if a couple major Capex events occur simultaneously, which thanks to Murphy's law they always do.
In my opinion the way to do it is to total up the big ticket items that may need to be addressed during the intended hold period, for example if you're planning to hold for ten years and the property is already 50 years old and in rough shape it might need 1 roof at $10k, 2 water heaters at $5k, new furnace $8k, sewer line $15k, appliances twice at $12k, driveway repaved at $9k, Kitchen and bath rehab at $20k... Let's say the total is $80k, divide that by 120 months= $666/mo. (wow, totally unintended ominous number!), plus your normal repairs, maintenance and whatever other miscellaneous **** that hits the fan of course. I've read it costs an average of $1,200/mo. to maintain a home. It's probably a lot more than most people expect which is why it's hard to make any money on inexpensive property with rent less than $1,000/mo. Literally all of that and more, most likely A LOT more, is going to get devoured by Capex over time.
I allocate $20k extra for each property when I purchase (on top of any rehab budget, and I build it into the sales price when I'm running my financial analysis, side note these are MF properties 3 units and bigger). I do this just because in my experience when I take on new properties I like to fix things. Generally I find at least some unexpected deferred maintenance type stuff that the seller didn't address, the type of thing that is better to take care of now rather than let it get worse and more expensive to deal with later. Then as far as allocating for Capex I use something like the above method, custom for each property, and have plenty of reserves held in mutual funds so I don't become an undercapitalized deadbeat landlord that can't afford to fix things or pay the mortgage when a furnace and a sewer line decide to call it quits at the same time, which just happened to me at the beginning of this year.
No way I would invest in RE with that kind of capex.
For a refrigerator, I find the best one on Craiglist for $150, I do the same for the stove. They say never to buy a used hot water heater... but hey, it‘s a cheap rental and mine went out, so let’s check Craigslist or Letgo, sure enough $175 (how does $125 cash right now sound? Good, great)! Furnace-$700, AC unit-$550 both purchased from a wholesaler of hvac in town... now to find an installer... Hey hvac buddy, any of your friends get a dui recently and get fired or anyone need some money? I got $1000 to whoever installs these, I‘d like to do $600 if you‘re cool with that, I‘m an investor... Sewer line excavated and replaced, $1500 tops or I‘ll get out a shovel myself. Repaved driveway done professionally-3kish, by why do it? It‘s a rental, pour some quickrete in the hole and move on.
$1000 or less rents work for investors all the time, but got to quit being the guy at the end of the rainbow.
- Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes7y
Originally posted by @Jonathan R.:
Originally posted by @Steve K.:
Originally posted by @Mindy Jensen:
Originally posted by @Steve K.:
@Mindy Jensen What works for me is to burn 50 dollar bills in each corner of all new properties, within 1 hour of taking ownership. It's my version of sage smudging. Then I set aside $1million per square foot to handle unexpected Capex, maintenance and repairs. It's never enough, but I can always sell my plasma if I need to. Owning property is expensive.
Owning property IN BOULDER is expensive.
Yes that's true, that's why I substitute 5's for 50's when I'm smudging my Longmont properties, and only allocate $500k per square foot for Capex, plus my first born for repairs.
In all seriousness though to address your post: perhaps the biggest mistake I see people making on here is using percentages or other rules of thumb instead of crunching the actual numbers specific to a property. It's especially dangerous when using a percentage of a low rent amount. If gross rent is anything less than say $1,000/mo. I'd be afraid even 100% of that is not nearly enough to meet the baseline cost to maintain a property, especially the type of inexpensive property that "cash flows" with $1,000/mo. rent. An expected $200/month cash flow can turn into a big hole that takes years to crawl out of very quickly if a couple major Capex events occur simultaneously, which thanks to Murphy's law they always do.
In my opinion the way to do it is to total up the big ticket items that may need to be addressed during the intended hold period, for example if you're planning to hold for ten years and the property is already 50 years old and in rough shape it might need 1 roof at $10k, 2 water heaters at $5k, new furnace $8k, sewer line $15k, appliances twice at $12k, driveway repaved at $9k, Kitchen and bath rehab at $20k... Let's say the total is $80k, divide that by 120 months= $666/mo. (wow, totally unintended ominous number!), plus your normal repairs, maintenance and whatever other miscellaneous **** that hits the fan of course. I've read it costs an average of $1,200/mo. to maintain a home. It's probably a lot more than most people expect which is why it's hard to make any money on inexpensive property with rent less than $1,000/mo. Literally all of that and more, most likely A LOT more, is going to get devoured by Capex over time.
I allocate $20k extra for each property when I purchase (on top of any rehab budget, and I build it into the sales price when I'm running my financial analysis, side note these are MF properties 3 units and bigger). I do this just because in my experience when I take on new properties I like to fix things. Generally I find at least some unexpected deferred maintenance type stuff that the seller didn't address, the type of thing that is better to take care of now rather than let it get worse and more expensive to deal with later. Then as far as allocating for Capex I use something like the above method, custom for each property, and have plenty of reserves held in mutual funds so I don't become an undercapitalized deadbeat landlord that can't afford to fix things or pay the mortgage when a furnace and a sewer line decide to call it quits at the same time, which just happened to me at the beginning of this year.
No way I would invest in RE with that kind of capex.
For a refrigerator, I find the best one on Craiglist for $150, I do the same for the stove. They say never to buy a used hot water heater... but hey, it‘s a cheap rental and mine went out, so let’s check Craigslist or Letgo, sure enough $175 (how does $125 cash right now sound? Good, great)! Furnace-$700, AC unit-$550 both purchased from a wholesaler of hvac in town... now to find an installer... Hey hvac buddy, any of your friends get a dui recently and get fired or anyone need some money? I got $1000 to whoever installs these, I‘d like to do $600 if you‘re cool with that, I‘m an investor... Sewer line excavated and replaced, $1500 tops or I‘ll get out a shovel myself. Repaved driveway done professionally-3kish, by why do it? It‘s a rental, pour some quickrete in the hole and move on.
$1000 or less rents work for investors all the time, but got to quit being the guy at the end of the rainbow.
Just picked up a beautiful bathroom vanity with white marble counter at resource for $45 (retail $800). Also hand dug a sewer line earlier this year. But I wasn’t talking about us hands-on types, more so addressing those new investors who still naively use the term “passive income”. Using even 50% for capex on let’s just say $700 rent is probably not enough over time unless you’re a true bootstrapper like you and I. Even DIYing almost everything and getting average $5k/mo. gross rent on each of my MF properties I have months where I’m negative by a lot. Expensive stuff comes up no matter who you are or how nice the property is, and I’m saying the combo of outsourcing everything and using a calculation that only allocates a few hundred per month or even less for capex is a recipe for disaster. Even if nothing breaks it will take years to build up an adequate reserve if you’re only holding a few hundred aside each month, like 15% of $1,000 or even worse... I’ve seen numbers on here where they’re allocating 5% of rent and rent is only $650, that’s not nearly enough.
- Investor · Wichita, KS · Member since 2017 · 584 posts · 813 votes7y
Originally posted by @Steve K.:
Originally posted by @Jonathan R.:
Originally posted by @Steve K.:
Originally posted by @Mindy Jensen:
Originally posted by @Steve K.:
@Mindy Jensen What works for me is to burn 50 dollar bills in each corner of all new properties, within 1 hour of taking ownership. It's my version of sage smudging. Then I set aside $1million per square foot to handle unexpected Capex, maintenance and repairs. It's never enough, but I can always sell my plasma if I need to. Owning property is expensive.
Owning property IN BOULDER is expensive.
Yes that's true, that's why I substitute 5's for 50's when I'm smudging my Longmont properties, and only allocate $500k per square foot for Capex, plus my first born for repairs.
In all seriousness though to address your post: perhaps the biggest mistake I see people making on here is using percentages or other rules of thumb instead of crunching the actual numbers specific to a property. It's especially dangerous when using a percentage of a low rent amount. If gross rent is anything less than say $1,000/mo. I'd be afraid even 100% of that is not nearly enough to meet the baseline cost to maintain a property, especially the type of inexpensive property that "cash flows" with $1,000/mo. rent. An expected $200/month cash flow can turn into a big hole that takes years to crawl out of very quickly if a couple major Capex events occur simultaneously, which thanks to Murphy's law they always do.
In my opinion the way to do it is to total up the big ticket items that may need to be addressed during the intended hold period, for example if you're planning to hold for ten years and the property is already 50 years old and in rough shape it might need 1 roof at $10k, 2 water heaters at $5k, new furnace $8k, sewer line $15k, appliances twice at $12k, driveway repaved at $9k, Kitchen and bath rehab at $20k... Let's say the total is $80k, divide that by 120 months= $666/mo. (wow, totally unintended ominous number!), plus your normal repairs, maintenance and whatever other miscellaneous **** that hits the fan of course. I've read it costs an average of $1,200/mo. to maintain a home. It's probably a lot more than most people expect which is why it's hard to make any money on inexpensive property with rent less than $1,000/mo. Literally all of that and more, most likely A LOT more, is going to get devoured by Capex over time.
I allocate $20k extra for each property when I purchase (on top of any rehab budget, and I build it into the sales price when I'm running my financial analysis, side note these are MF properties 3 units and bigger). I do this just because in my experience when I take on new properties I like to fix things. Generally I find at least some unexpected deferred maintenance type stuff that the seller didn't address, the type of thing that is better to take care of now rather than let it get worse and more expensive to deal with later. Then as far as allocating for Capex I use something like the above method, custom for each property, and have plenty of reserves held in mutual funds so I don't become an undercapitalized deadbeat landlord that can't afford to fix things or pay the mortgage when a furnace and a sewer line decide to call it quits at the same time, which just happened to me at the beginning of this year.
No way I would invest in RE with that kind of capex.
For a refrigerator, I find the best one on Craiglist for $150, I do the same for the stove. They say never to buy a used hot water heater... but hey, it‘s a cheap rental and mine went out, so let’s check Craigslist or Letgo, sure enough $175 (how does $125 cash right now sound? Good, great)! Furnace-$700, AC unit-$550 both purchased from a wholesaler of hvac in town... now to find an installer... Hey hvac buddy, any of your friends get a dui recently and get fired or anyone need some money? I got $1000 to whoever installs these, I‘d like to do $600 if you‘re cool with that, I‘m an investor... Sewer line excavated and replaced, $1500 tops or I‘ll get out a shovel myself. Repaved driveway done professionally-3kish, by why do it? It‘s a rental, pour some quickrete in the hole and move on.
$1000 or less rents work for investors all the time, but got to quit being the guy at the end of the rainbow.
Just picked up a beautiful bathroom vanity with white marble counter at resource for $45 (retail $800). Also hand dug a sewer line earlier this year. But I wasn’t talking about us hands-on types, more so addressing those new investors who still naively use the term “passive income”. Using even 50% for capex on let’s just say $700 rent is probably not enough over time unless you’re a true bootstrapper like you and I. Even DIYing almost everything and getting average $5k/mo. gross rent on each of my MF properties I have months where I’m negative by a lot. Expensive stuff comes up no matter who you are or how nice the property is, and I’m saying the combo of outsourcing everything and using a calculation that only allocates a few hundred per month or even less for capex is a recipe for disaster. Even if nothing breaks it will take years to build up an adequate reserve if you’re only holding a few hundred aside each month, like 15% of $1,000 or even worse... I’ve seen numbers on here where they’re allocating 5% of rent and rent is only $650, that’s not nearly enough.
I agree. And from my post some might think I‘m slumlordy, not the case. My properties are very nice, the kitchen and bathroom tile work looks like HGTV. I make a really nice rental by addressing almost everything. My real asset though is my contractor, the guy is like Macgyver and very affordable. He stays with me because I keep buying so he stays busy, I pay his phone bill, and have gotten him vested in my business by offering to partner with him/buy him a cheap bonus property when he‘s completed 10 gut renovations basically. I personally have no handyman skills but I sure would figure some things out if my business wasn‘t growing as rapidly as it is.
- Real Estate Agent · Santa Barbara, CA · Member since 2016 · 518 posts · 283 votes7y
@Mindy Jensen I would say you should calculate it depending on the property you choose to invest in. How I would go about calculating it is take all your potential capital expenditures for example your hvac and roof. Then estimate it’s remaining life. Then you would estimate the inflation adjusted cost to replace it. Take the cost and amortize it over the remaining life (don’t forget to account for the lump sum of money you set aside for the reserve fund initially). Sum up the monthly payments for each capex items and that number is what you need to be saving each month and putting in your reserve fund. How much money you put in initially as a lump sum and where you cap your reserve fund depends on your risk tolerance. There are more accurate ways to estimate how much you should have in your reserve fund but they require more advanced math and analysis that most members here won’t be able to preform. If anyone is interested in knowing any of the more advanced methods feel free to ask me.
- New to Real Estate · Marietta, GA · Member since 2018 · 169 posts · 40 votes7y
Do you keep in a savings account or investment?
Thanks in advance
Originally posted by @Account Closed:
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.
- Investor · Leander, TX · Member since 2016 · 299 posts · 402 votes7y
Chase Business Account separate from my checking account. Easier to keep track of and makes a separate statements for lenders.
- 7yJohn MorganPro MemberRental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
I live in North Texas where foundations are a problem. I had 4 out of my 5 Texas properties have doors that wouldn’t shut and cracks in walls last July. That cost me 19k in foundation repairs. Had to repair interior wall cracks and new paint to three of them for 6k. Then I had four HVAC units go out within a few weeks of the foundations being repaired. And of course I’m on vacation when a couple of my ACs went out! That was another 18k. Two of these homes were really old and needed an updated electrical box to handle the new HVAC units properly which cost $3,500. Needed a new roof on one which cost me 5.5k. Siding rotted out on one so had to replace that with new outside paint which was 4K. Plumbing leak under foundation slab was $1,800. Water leak on another cost me $1,200. Water leak found on another cost me 3k which included new floors. Had to remodel a bathroom due to plumbing leak. And do major sheet rock on one unit that had water damage and had to repair burned up walls in the garage due to my tenant’s dryer catching on fire.
All this happened over a few months. I thought 50k cash in the bank would be a decent reserve for my 6 rentals. I was wrong. I needed 70k for these random repairs over just a few months. Ouch. But I also feel I had an anomaly of bad luck over a short period of time. This seemed to be a little extreme. But as Kevin O’Leary always says, “Poop happens” so be prepared. I hope things calm down this year and I can build up my cash reserve. I had to take out a no interest loan for 18 months to pay for some of this. And needless to say, my wife who hates me being involved in real estate hasn’t been happy with my investment in real estate so far. Haha. I’ve only been doing it for four years. I’m determined it’ll get better!
Join the conversationCreate a free account to reply, vote on answers and follow this thread.