All Forum Posts by: Robert Jordan

You can still anticipate 10% of rent for ordinary maintenance and setting aside 10% for capex. Although you may not have to replace the roof, you may still get hit with a special assessment to replace the pool or road or club house or fence or something.

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.

With a condo you want to make sure it has been well maintained, has a healthy reserve fund and check the history or special assessments.  Condo fees, especially unexpected ones, can add a lot to your expenses.  I've bought a few, but with the last purchase, I ran the numbers on a condo vs single family home and the numbers at the end of the day were better on the latter.

The age, amenities, and HOA terms are going to be huge factors in this. Condo special assessments can be significant if big expenses come up (roof replacement, for example).

How old are the major systems?