Cap Ex is killing my deals

[Sarah Ottesen]

Hi!  I would love some input on Cap Ex for the new-but-have-a-couple-of-properties-under-their-belt investor.  Currently we have two properties/6 units.  We are putting into a savings account a portion of the rents each month for capital expenditures.  We estimated theses amounts using the table from Ben Leybovich's blog, a conversation between Ben and Sergie (https://www.biggerpockets.com/renewsblog/2015/03/03/why-you-cant-make-money-on-30000-houses/).  

My question is, when analyzing deals, how important is it to keep taking out the whole portion for estimated capital expenditures; is there a point in time where you can start to borrow the cap ex reserves from one property to another?  Or maybe build a reserve fund of 6 months of expenses for each property.  I am almost leaning toward the latter because it seems easier to quantify and justify.  That is, if Property A has monthly expenses (i.e. debt service, insurance, taxes, property management, estimated maintenance and cap ex) of $1,000 and Property B has monthly expenses of $1,300, I would save cap ex until I reach $13,800 (($1,000+1,300)*6 months) Then, when I am analyzing a new deal I could take all rents into consideration to take out what will be needed for cap ex on Property C.  When Property C is purchased, my Cap Ex Fund will need to be increased by the estimated monthly payment of Property C * 6 months.  Maybe 6 months isn't the magic number, maybe it should be more.  

What are your thoughts.  

Thanks in advance!

[Thomas S.]

What I do is maintain a line of credit multiple times larger than I would likely ever need. When I have a expense I draw from my credit line and then pay it off over the following months from my cash flow. I have plenty of money as I never leave any equity in a property but that money is invested elsewhere.. I am a big believer in leverage.

This only works if you have more credit available than you would need as it does impact your debt ratio.