CapEx & Maintenance maximum set-aside?

4 Replies

I understand that, as a buy-and-hold investor, it is important to set aside a certain amount of cash in order to cover maintenance and capital expenditures.

It seems a bit odd, though, that these are typically expressed as a percentage of the gross monthly income. While I understand that may be a sensible saving rate, isn't there some point where one might be safe to stop setting aside funds and be reasonably 'safe'?

Or is there a reason to set aside funds in perpetuity, regardless of how much one has stockpiled?

Originally posted by @Jeff C. :

I understand that, as a buy-and-hold investor, it is important to set aside a certain amount of cash in order to cover maintenance and capital expenditures.

It seems a bit odd, though, that these are typically expressed as a percentage of the gross monthly income. While I understand that may be a sensible saving rate, isn't there some point where one might be safe to stop setting aside funds and be reasonably 'safe'?

Or is there a reason to set aside funds in perpetuity, regardless of how much one has stockpiled?

 Unfortunately, what you just observed, is missed by many.  It's the fascination with percentages instead of dollars that does it.  Why I don't know, but you're right.  Take it a step further though.  Using a percentage doesn't even cover what you would need to begin with.  It's a false security blanket.

Let's look at the real number$...the ones we use for the actual rehab we are holding back for. Let's take a rent of $1000/month. If we held back 10% for rehab/CAPEX, that's only $100/month...and at the END OF THE YEAR, it totals only $1200. What in the world is that really going to cover? NOTHING.

Holding back a percentage of money is a waste of time...and it doesn't do what it's supposed to do. What you need to do is figure out what you need to cover...in actual dollar$. Then figure out a way to set that aside in reserve. I use my HELOC for that. I have access to more than enough if/when one of those "surprises" occurs...and I'm not messing up my analysis using "fudge factors".

We calculate replacement reserves in terms of a per unit ratio.  Industry norm is $250/unit per year.  Depending on the condition of the property that number may fluctuate.  On our most recent deal we are setting aside $319/unit per year.  If all of the replacement reserves dollars aren't used at the time of sale you can simply keep it, or in our case, return the money to the investors.  Never hurts to have a surplus of money in case of unseen rough times!