Maintnence repairs, and appliance replacement questions

[Ta'Voris Murray]

Im currently in the process of looking at a duplex that is already completely leased out and has been for the past 12 years. The owner is selling because they are looking to purchase a new property quickly, so the deal that I would get on this property is a good one to say the least. With this being my first rental property (potentially if all plays out well), Im hard press to think about the what if's. The biggest one being, what if their stove or any other major appliance goes out? How could I possibly afford to replace something so large without going under? I know that it's a BIG what if, but that question has been haunting me since I figured out what a real estate investor is. Im kinda hopping into this with no money reserves and Im just curious if its even a good idea to keep pursuing this property if I dont have anything on hand for any future issues. 

I guess to get down to the soups and nuts of the post, the question is this: How do Investors handle the replacement of large appliances, and any other technician fees from a handy man being sent out by either myself or a property manager? Is there a solution that wouldn't require me to have the money necessary to fix any problem all at once?

Sorry if this is a rookie question, but im for sure a rookie. 

[Nathan Gesner]

Quote from @Ta'Voris Murray:

Decent used appliances can be picked up for under $200. If that's a concern for you, then you are in the wrong business. One bad Tenant can cost you $5,000 without even breaking a sweat!

Wise investors are able to withstand the obstacles by planning ahead. Always keep a reserve fund to handle maintenance, vacancies, major repairs, etc.

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.