The Cost of Unforeseen Repairs?

Question

Any measure of experience will teach you to plan for the Unforeseen Expense. I wonder though, for budgeting purposes, is there a prescribed percentage of net cash flow that's good to set aside for maintenance and repairs during the course of a Rental? (ie. 3%, 6%, etc)

Michael Swan · Answer

Thank you @Adam Scheetz,

I can tell you some very expensive stories of when Murphy raised its ugly head!! That little 6-8% in reserves would not have covered 1/10th of the cost.

Swanny

Michael Swan · Answer

You guys are not going to like my answer.  It comes from experience.  I currently am a principal in over 122 front doors.  I started buying one little rental property at a time. I now have economies of scale.  If you buy one little rental property, forget that 8% etc... for reserves.  You need $10,000 to start in reserves for one little rental property.  If you have 2 at least $15,000 in reserves. 3-5 $20,000 in reserves. 6-10 about $30,000 in reserves.

Be very careful!! It is not if Murphy will rear its ugly head, it is when!!

Swanny

Michael Swan · Answer

Another thing, that little 5%-8% won't pay for much!!

Swanny

Will G. · Answer

if we are talking single family try to stick to 50%. If you come across something you really like and feel rock solid about future appreciation, go ahead and squeeze down the 50 to 40% for expenses, but generally dont count on appreciation, pray for it but dont count on it.

If we are talking about multifamily, that might change things a bit, and gets determined by # of units, condition, etc.

Will G. · Answer

@Adam Scheetz on single family?

Largely depends on age and condition and how long you will hold a property. Long term you end up consuming roof's, hvac's, flooring, cabinets etc, so if  you want to buy and hold figure on around 40% of your gross rents goes to expenses.

Many folks use 8% for r and m and 8% for capex, and are happy if they come back less

Adam Scheetz · Answer

@Will G. Okay, so I've pretty much been utilizing the 50% rule thinking that would be conservative enough to properly set safe margins for what to ask in terms of sale price, set rent, and factoring mortgages. I think I like 8 & 8, I'd rather have extra money at the end of the month as opposed to too much month at the end of my money!

The Cost of Unforeseen Repairs?

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