Setting Aside Funds For Cap-ex, Repair, Vacancy, etc.

2 Replies

Hey BP, So I know we were taught to make sure we account for cap ex, repairs, and vacancy at a monthly rate when analyzing deals. My question is, why don’t we just make sure we keep a healthy cash reserve to be ahead of the game just in case repairs are needed to be made as soon as we purchase? In a perfect world, we could set aside funds monthly and not have any big repairs for 5 years or so. But, you and I both know that, that may never happen and you’d better be prepared for something big to come up. I get it when analyzing to minimize risk and make sure a deal cash flows, but I feel like that may really get someone crunched if not prepared.

I agree that you need to have a plan for how to pay for large repairs etc when needed. I think that the monthly rate is intended as a way of making sure that your monthly cashflow will support replenishing that cash reserve after its been spent. Personally, I have access to easy financing through a line of credit on my family farm. This lets me take care of repairs etc without needing to keep a large cash reserve, which means that most of my money is invested at any given time. The downside of that strategy is that I needed to be VERY careful with my first few deals because I was, quite literally, betting the farm on each one. It also meant that we had to look around for a while before we found a lender who was willing to look at our individual situation without trying to slot us into a pre-existing category.

Howdy @Kendall Short

Here's the way I approached the issue of cash reserve's.

I did not have the extra cash saved up when I started. Only had the initial Acquisition/Rehab costs. I use the BRRRR strategy to acquire my Buy and Hold properties. A Private Lender pays for the initial purchase and I cover the Rehab with my HELOC. I also have a Personal LOC that I used to cover those potential expenses before I had the cash.

For my cash flow analysis I use 55% expenses to remain conservative. That will cover a minimum of 8.34% Vacancy (1 months rent), 10% CapEx, 5% Maintenance, for reserves. It also covers the rest of normal operating expenses (taxes, insurance, PM, accounting, legal, utilities, lawn care, etc.). I have every property inspected to determine the current condition and life expectancy of all major components and appliances. I use this report to decide what to include in the Rehab budget and what can be deferred for CapEx reserves (anything over 5 years). This gives me a more accurate CapEx number.

I put all the Vacancy, CapEx, and Maintenance funds from all properties into one account. This serves two purposes. First, I want to build enough reserves to be able to cover 6 months of mortgage payments for all my properties. Second, When I start looking to acquire small Apartments the Commercial Lender will want to see cash reserve's.

Since my properties are freshly Rehabbed I do not expect to have any CapEx expenses. I plan to keep them only for 5 years then exchange up to a larger property. I do expect minor maintenance and possibly some vacancies. But, if a CapEx doe's occur I will be covered. So this fund should be able to grow fairly quickly.

To your point I do agree you need to be able to cover any large expense in the beginning. Either save the cash or have a LOC/HELOC for when the eventual need arises.

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