Help with budgeting maintenance, capex, and vacancy for a SFH

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Help with budgeting maintenance, capex, and vacancy for a SFH

Austin Irwin
Rental Property Investor · Chambersburg, PA · Member since 2016 · 9 posts · 0 votes

Hello BP community,

I was hoping for some insight regarding budgeting for maintenance, capex, and vacancy for a SFH in Shippensburg, PA. This is my first rental, so I am a newbie. I have read that a popular rule is 5-5-5% of gross rent or something similar.

To give a little background, this is my former primary residence of five years.  The house rents for $1,300.  The market value is around ~180k but this is due to appreciation, not my purchase price five years ago.  The home is very basic: electric baseboard heat, no a/c, not many bells and whistles that will need to be maintained.  During my residence there, I took care of many capital/improvement related expenses such as new roof, new garage doors, etc.   Even without being able to look in a crystal ball, I can reasonably foresee that my only anticipated expenses in the near term will be wear and tear from tenants, appliance replacements, and a well pump eventually.

So my questions to all of you with much more experience than I are as follows:

1.  Would you see this 5-5-5% of gross monthly rent being adequate for upkeep and vacancy on the property?

2.  Without trying to overcomplicate things, for bookkeeping purposes do you continuously allocate these funds to these three buckets regardless of whether you ever need to tap into these funds?  For example, let's say I can go three years without a vacancy.  Do you still continue to allocate the 5% to the vacancy bucket every month because you know that eventually you will need to tap into it?  I can keep allocating if it would be prudent, but I don't want to tie up capital that I could redeploy elsewhere.

Thanks in advance for any insight!

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David Lee Hall, III
Rental Property Investor · Pittsburgh, PA · Member since 2019 · 530 posts · 511 votes
4y

"Allocation"
-> So if you look at Profit First, you could use the bucket method there and set up savings accounts for each bucket. I am lazy. I have a single savings account for these reserves that I dump into. You should have a seperate one for rental deposits in PA. 

What I like to use (though I don't always follow it) is:
Vacancy: Either 8.5% (1 month a year) or 4.25% a year (figuring you will have vacancy of a month over 2 years of leases, so half a month per year)
OpEx (Maintenance): This is more based on the age of the home and if I rehabbed it prior to leasing. If I did not rehab everything and it is pre-modern code (so built before 1980ish) I will allow 10% because I am going to have more maintenance. That said, I usually rehab too much unless I inherit a tenant. If I do everything I will use 5%. 
CapEx: 10% for an older home is safe and 5% for a newer build. Really, this is one you should figure out per property not use a random general percent (at least until you have lots of properties where you can rob Peter to pay Paul). Take a serious look at what components will need to be replaced: HVAC, Roof, Windows, etc. Figure out when in a 30-year mortgage (or 20 etc) you would need to replace these items. Ballpark the cost, then realize that the *goal* of the Fed is to have 2% inflation a year, and plug that cost in a calculator to see what say a furnace would cost in 15 years based on the plans of the powers. Now you will know you need windows in 15 years, a water heater in 5, a furnace in 12, etc. If you sum all of those costs and look at the last replacement date, you can now figure out you need to on average save $2,400 a year to meet the needs of your structure over the time you calculated. That is $200 a month you need to save, which is 15% not 5 or 10. This is why taking 20 minutes to determine what you are going to put in and when on CapEx can be very important. On the flip side, you could say everything will be good for 10 years and you are going to sell in year 9 so you don't have to address them. In this case you may only save a minimal amount for emergencies.

So my basic is 4.25% Vacancy, 5 or 10% OpEx depending on condition, and a variable amount on CapEx depending on rent roll and age of home components. 10% can be a safe number.

In regards to continuing to add to say the Vacancy bucket, that is a personal choice. I focus on long term tenants so honestly that isn't a big item for me. The key is twofold: having money for turnover and having money to pay the bills when there is no income. You could simply have a reserve per house which is actually what I switched to when I realized I provided homes folks weren't jumping to leave. $5k per SFH and $2.5k per unit of a MFH (which I am getting my first in about 3 weeks).

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  • Taylor L.
    Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes
    4y

    If you take those percentages and apply them to your anticipated rents, does that mean you'll have enough in dollars to cover those expenses? Things like appliances and well pumps only get so cheap. Since you lived there you probably have a good idea of the expected future life of most of those items.

    #2 is really a question about building reserves. You're not likely to regret having healthy reserves built up over time. IMO reserves that are properly budgeted toward future expenses shouldn't be seen as missed opportunities to invest elsewhere.

    0Reply
  • David Lee Hall, III
    Rental Property Investor · Pittsburgh, PA · Member since 2019 · 530 posts · 511 votes
    4y

    "Allocation"
    -> So if you look at Profit First, you could use the bucket method there and set up savings accounts for each bucket. I am lazy. I have a single savings account for these reserves that I dump into. You should have a seperate one for rental deposits in PA. 

    What I like to use (though I don't always follow it) is:
    Vacancy: Either 8.5% (1 month a year) or 4.25% a year (figuring you will have vacancy of a month over 2 years of leases, so half a month per year)
    OpEx (Maintenance): This is more based on the age of the home and if I rehabbed it prior to leasing. If I did not rehab everything and it is pre-modern code (so built before 1980ish) I will allow 10% because I am going to have more maintenance. That said, I usually rehab too much unless I inherit a tenant. If I do everything I will use 5%. 
    CapEx: 10% for an older home is safe and 5% for a newer build. Really, this is one you should figure out per property not use a random general percent (at least until you have lots of properties where you can rob Peter to pay Paul). Take a serious look at what components will need to be replaced: HVAC, Roof, Windows, etc. Figure out when in a 30-year mortgage (or 20 etc) you would need to replace these items. Ballpark the cost, then realize that the *goal* of the Fed is to have 2% inflation a year, and plug that cost in a calculator to see what say a furnace would cost in 15 years based on the plans of the powers. Now you will know you need windows in 15 years, a water heater in 5, a furnace in 12, etc. If you sum all of those costs and look at the last replacement date, you can now figure out you need to on average save $2,400 a year to meet the needs of your structure over the time you calculated. That is $200 a month you need to save, which is 15% not 5 or 10. This is why taking 20 minutes to determine what you are going to put in and when on CapEx can be very important. On the flip side, you could say everything will be good for 10 years and you are going to sell in year 9 so you don't have to address them. In this case you may only save a minimal amount for emergencies.

    So my basic is 4.25% Vacancy, 5 or 10% OpEx depending on condition, and a variable amount on CapEx depending on rent roll and age of home components. 10% can be a safe number.

    In regards to continuing to add to say the Vacancy bucket, that is a personal choice. I focus on long term tenants so honestly that isn't a big item for me. The key is twofold: having money for turnover and having money to pay the bills when there is no income. You could simply have a reserve per house which is actually what I switched to when I realized I provided homes folks weren't jumping to leave. $5k per SFH and $2.5k per unit of a MFH (which I am getting my first in about 3 weeks).

    1Reply
  • Austin Irwin
    OP
    Rental Property Investor · Chambersburg, PA · Member since 2016 · 9 posts · 0 votes
    4y
    Quote from @Taylor L.:

    If you take those percentages and apply them to your anticipated rents, does that mean you'll have enough in dollars to cover those expenses? Things like appliances and well pumps only get so cheap. Since you lived there you probably have a good idea of the expected future life of most of those items.

    #2 is really a question about building reserves. You're not likely to regret having healthy reserves built up over time. IMO reserves that are properly budgeted toward future expenses shouldn't be seen as missed opportunities to invest elsewhere.


     Thanks for the reply, Taylor!

    0Reply
  • Austin Irwin
    OP
    Rental Property Investor · Chambersburg, PA · Member since 2016 · 9 posts · 0 votes
    4y
    Quote from @David Lee Hall, III:

    "Allocation"
    -> So if you look at Profit First, you could use the bucket method there and set up savings accounts for each bucket. I am lazy. I have a single savings account for these reserves that I dump into. You should have a seperate one for rental deposits in PA. 

    What I like to use (though I don't always follow it) is:
    Vacancy: Either 8.5% (1 month a year) or 4.25% a year (figuring you will have vacancy of a month over 2 years of leases, so half a month per year)
    OpEx (Maintenance): This is more based on the age of the home and if I rehabbed it prior to leasing. If I did not rehab everything and it is pre-modern code (so built before 1980ish) I will allow 10% because I am going to have more maintenance. That said, I usually rehab too much unless I inherit a tenant. If I do everything I will use 5%. 
    CapEx: 10% for an older home is safe and 5% for a newer build. Really, this is one you should figure out per property not use a random general percent (at least until you have lots of properties where you can rob Peter to pay Paul). Take a serious look at what components will need to be replaced: HVAC, Roof, Windows, etc. Figure out when in a 30-year mortgage (or 20 etc) you would need to replace these items. Ballpark the cost, then realize that the *goal* of the Fed is to have 2% inflation a year, and plug that cost in a calculator to see what say a furnace would cost in 15 years based on the plans of the powers. Now you will know you need windows in 15 years, a water heater in 5, a furnace in 12, etc. If you sum all of those costs and look at the last replacement date, you can now figure out you need to on average save $2,400 a year to meet the needs of your structure over the time you calculated. That is $200 a month you need to save, which is 15% not 5 or 10. This is why taking 20 minutes to determine what you are going to put in and when on CapEx can be very important. On the flip side, you could say everything will be good for 10 years and you are going to sell in year 9 so you don't have to address them. In this case you may only save a minimal amount for emergencies.

    So my basic is 4.25% Vacancy, 5 or 10% OpEx depending on condition, and a variable amount on CapEx depending on rent roll and age of home components. 10% can be a safe number.

    In regards to continuing to add to say the Vacancy bucket, that is a personal choice. I focus on long term tenants so honestly that isn't a big item for me. The key is twofold: having money for turnover and having money to pay the bills when there is no income. You could simply have a reserve per house which is actually what I switched to when I realized I provided homes folks weren't jumping to leave. $5k per SFH and $2.5k per unit of a MFH (which I am getting my first in about 3 weeks).


    Thanks, David. I appreciate the insights, especially regarding CapEx. Your comments around it made me realize that I should probably do a little more analysis around the life span of certain systems that are installed!

    0Reply
  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    4y

    You should generally allocate somewhere between 5% and 10%. Nobody can know the answer without knowing everything about the property, the market, and you. Personally, I would recommend 10% for each until you have a solid reserve, then start putting that money into a different account for the next investment.

    This is not an exact science. It depends on your financial strength, the quality of the property, how many properties you own, etc.

    I like to start with one major expense and three months of vacancy. Imagine if you had one single-family home. The tenant fails to pay their last month's rent and leaves the place needing new flooring and paint. It will take two months to turn it around and get it rented. That's three months of mortgage and utilities, the cost of flooring, and the cost of painting. That's a pretty common scenario and could cost you $10,000 - $15,000 so that would be a good starting point for your reserve.

    But there's more!

    What if you're a cardiologist with no debt and making $250,000 a year? You could probably afford $20,000 without much impact on your personal budget. If you're a single mom with student loans, a car payment, and living paycheck-to-paycheck, then $20,000 would be devastating and a reserve is critical.

    What if you have an apartment complex with 20 units? Do you save three months of vacancy for each unit and $50,000 for the roof replacement? That would be around $90,000 sitting in a savings account! At this point, I would recommend having a line of credit to cover these things so you don't have money sitting in the bank doing nothing when it could be put to work.

    I have 33 units, no debt except for mortgages, and excellent income. I can pay for all my problems using the cashflow from my current rentals. I also have a $175,000 line of credit at the ready if something catastrophic happened. A reserve is unnecessary, but I still keep around $15,000 - $20,000 in my account.

    The point is, you should sit down and assess your personal finances to determine what the worst-case scenario may look like, how much you would need to cover it without impacting your life, and whether you will need to build a reserve.

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  • David Lee Hall, III
    Rental Property Investor · Pittsburgh, PA · Member since 2019 · 530 posts · 511 votes
    4y
    Quote from @Nathan Gesner:

     I would recommend having a line of credit to cover these things so you don't have money sitting in the bank doing nothing when it could be put to work.

     Two comments on this. 
    Absolutley on some type of credit line. I have a HELOC on one rental I can use. However, you can't control credit markets and lenders can turn off credit lines at their desire, so this better not be the only source of emergency funds even if it is the one you go to first.

    Second, that money in the bank isn’t “doing nothing” as you suggest. Sure, it isn’t making more baby dollars (at least in this rate environment) but it is providing piece of mind and effectively security for your dollars that are making more dollars. If you are living off of that 20 unit cash flow and a situation hits where you can’t access the credit and you need a roof or will not have income, nothing gets a job done faster than handing a roofer a stack of bills. (Not that I recommend this, but cash does talk.) 

    Of course there are many arguments on both sides of this and really it comes down to what level of risk you are comfortable with.

    0Reply
  • Marcus Auerbach
    Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes
    4y

    Standardized percentages may not be wrong when averaged out over a large number of properties, but they are pretty useless when your sample size is one unit. 5% of $1,300 is $65 - that's not even a water heater after one year. What if you need a roof?

    The correct way of doing this is to lay out capex over a timeline, say water heater in 3 years, new roof in 15, estimate the cost and calculate backwards.

    Depending on your financial strength you may not need a reserve account. 

    0Reply
  • Austin Irwin
    OP
    Rental Property Investor · Chambersburg, PA · Member since 2016 · 9 posts · 0 votes
    4y

    Thank you all for your insights on this topic!

    0Reply
  • Kevin Jones
    Technology · McKinney, TX · Member since 2026 · 24 posts · 3 votes
    1mo

    A little late here ... the percentages are a fine starting point, but for capex I'd build it bottom-up. List the big-ticket items: roof, HVAC, water heater, exterior paint, flooring, appliances. For each, estimate replacement cost and remaining life. Serial numbers on water heaters and HVAC units usually decode to a manufacture year. Divide cost by months remaining and add it up. A $12k roof with 8 years left is $125/mo, and a $6k HVAC with 5 years left is $100/mo. On older houses that often lands above 10% of rent. For maintenance, 5-8% is typical, and more for older homes. For vacancy, one month a year is about 8%, which is a reasonable SFH default. Adjust it to your local market and revisit yearly.

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