Bought a duplex last year where the previous owner kept zero records. No idea when the roof was done, how old the water heater actually is, nothing. I had to walk the property with a flashlight and guess based on wear patterns and model stickers.
Curious how other people handle this. Do you just pick a flat percentage and pad it until you learn more, or do you try to reverse-engineer the age of each system first? what I ended up doing was building a rough age estimate for every major system (roof, HVAC, water heater, appliances) and comparing that against typical lifespan data, then padding the reserve higher for the first 12-18 months until I had more confidence. It's a lot more work upfront than just doing 1-2% of property value, but it stopped me from either overreserving on stuff that s actually new or underreserving on stuff that's about to die.
anyone else inherited a property blind like this? What was your process for getting from "no idea" to "actual number"?
Investor · Pflugerville, TX · Member since 2014 · 152 posts · 94 votes
2mo
We bought almost all of our rental properties through tax auctions so we never really know what we have until getting inside of it after the purchase. Usually a walk through like you did is helpful where you can look at the tags on the pieces of equipment and find the manufactured dates but that does not really tell you in what condition they are. The roof/foundation are usually just a visual inspection and we try to estimate how many years before it needs to be replaced.
We tend to upgrade the houses when we first buy them so we can roll it into our cost basis for depreciation purposes and help to minimize the major repairs for the next 10 years or so. This has really been the key to sustaining our rental portfolio with minimal stress.
As far as a reserve goes, we keep at least $25k in reserves and found that over time, this number held up across 20 or so rental units. Statistically, we plan on replacing a roof or foundation repair, two A/C units and some appliances every year and this reserve gets replenished by the rents every time we dip into it for major repairs. We tried keeping a percentage of each property but once you get above 10 units it becomes a lot of money and we decided to just use a $25k slush fund to encompass repairs on all of our units. We really did not need 2% ($40-50k) in repair reserves as we never get close to that number per year.
Not a very sophisticated system but is easy to follow and has lasted us successfully for 20+ years.
Investor · Hatboro, PA · Member since 2016 · 2k+ posts · 850 votes
2mo
I like the approach you took. I'd probably spend a little money upfront having the major systems looked at so I had a better idea of what I was dealing with. A roofer and HVAC contractor can usually give you a reasonable estimate of the remaining life, and I'd use that information to help decide how much I wanted in reserves. Spending a few hundred dollars on that is a lot cheaper than getting surprised by a major repair. Until I'd owned the property long enough to get a feel for it, I'd probably keep my reserves a little higher than normal. As I learned more about the property and replaced some of those unknowns with actual information, I'd adjust from there.