Reserve Amount - House hacking in Atlanta

[Sean Chua]

Hi guys!

I'm trying to analyze deals for house hacking (renting by the room) and am re-evaluating the way I calculate reserves. Currently, I use a percent multiplier by rent: 5% for repairs/maintenance, 8% for vacancy, and 5% for capital expenditures. Assuming I'm getting $4,000 gross rent, that means I'm putting $720 away in reserves. Is this too much? How do you guys calculate reserves?

[Rick Baggenstoss]

I think your assumptions are reasonable.  Your particular property will greatly affect the amount.  For example, a house hack on Lake Lanier would have higher vacancy than in the city.  Maintenance/capex on a 50 year old will be different than a 10 year old home.  

Often in a house hack, the owner is doing a few of the fixes so there are fewer maintenance calls.  If this were non-owner occupied or if you were not going to fix a couple of things, then your maintenance is low.  More people --->. more maintenance.

[Andrew Garcia]

Hi @Sean Chua, that is likely enough. However, renting by the room generally has more repairs so that is the only one you might be light on.

More people = more use = more deterioration

Hope this helps! Let me know if I can be of any assistance.

[Evan Polaski]

@Sean Chua, as Rick points out, what is right for you is wrong for someone else.  Is this a really nice house?  A subzero fridge (I am guessing) is going to cost more to repair and certainly to replace than a basic GE fridge from Home Depot. But more so current condition is a bigger indicator of repairs/maintenance than anything else.  

As for cap ex, I am guessing you are very light.  On average, my houses need to reserve about $400/mo in capex.  This should fully cover a new roof every 25 yrs (assuming new today), kitchen and bath Renos every 10-15 yrs, new HVAC every 15 yrs, exterior paint, interior paint, decks, patios, landscaping, gutters, etc.  And this is assuming everything is new today.  If you only have 5 yrs left on the roof, or the kitchen really needs an update, and you want to cover that from cashflow, then your monthly number needs to higher.

[Alex Talcott]

If you don't have partners or investors, you can likely cut it tighter and assess your personal finance situation, as opposed to treating the property as a business in a vacuum (especially when it's already not a standalone investment, with a home-for-you enjoyment factor).

You can think about all your assets on a continuum of liquidity.

[Michael Dumler]

@Sean Chua, since your maintenance cost and capex are variable expenses, you can further analyze and adjust after receiving the inspection report. Also, keep in mind, that rent by the room investments are heavier on utilities, which you will be responsible for covering. Tenants/roommates are more frequently using water and electricity than if the property were to be purposed as a traditional rental, in which case the tenant usually pays. Make sure you are accounting for this and bake it into the rent. Hope this helps!

[Sean Chua]

Thanks everyone for all the help! For context, I ideally want to find a single family residence around Sandy Springs (trying to find other places close to the city but am having some trouble pinpointing where else to buy that has decent crime rates) where I can rent out rooms at $800.

@Andrew Garcia

[Penny Brown]

Word of advice...when renting by rooms, keep it all one gender.  Holds down confusion.  Sandy Springs may not be a rent by room neighborhood, have you tested the market to see if room rents are working there?  I'd focus getting the right property  in the right area before I drill down into capex and maintenance. That can lead to analysis paralysis.  Walk a few homes in Sandy Springs with a realtor and get your feet wet! Happy House Hunting!