CapEx/Reserve accounts for each property

[Tyler Smith]

I purchased my first property back in January and I'm getting ready to purchase my 2nd. I live in Seattle so I'm starting out with the turnkey route. All properties have brand new HVAC system, hot water and roof so my expected CapEx in the near future is minimal.

Do you guys have a different account for each property, one for reserves and CapEx? It seems excessive to me to have multiple accounts for each property. I was thinking about having 1 account for each property that I hold roughly $10k in to account for reserves, CapEx, vacancy ect. and then adding to the account as I get closer to big ticket items needing to be replaced. The properties I'm looking at are in the $80k-$110k SFR.

Is this reasonable? Too conservative or not enough? I would love to hear how all you RE pros set up your accounts!

[Allan Smith]

I think a good way to handle capex is to add a few thousand to your Reserves each time you buy a property. By the time you get to 10 Properties or so, the cash flow from the properties would cover most larger expenses that would be even more than your reserved amount.

I don't have it down to an exact science by any means, but I use QuickBooks to keep track of what cash is allocated to. Rather than having multiple accounts, which to me seems like extra hassle.

[Mark S.]

@Tyler Smith, I currently have 5 turnkeys that also have all new pretty much everything.  I have these in my SMLLC.  I have one business checking account where rents are deposited and mortgages are automatically withdrawn.  I have a separate (just one) business savings account per property for all reserve items.  I like to “build these from scratch” with ongoing rent amounts.  In other words, I start them with a $0.00 balance and as rents come in, I put the monthly allocation from the rents (8% vacancy, 5% repairs, 5% capex for down the road, so 18% total of gross monthly rent) into the respective accounts.  This way, I can truly say that “the tenant paid for that” when things pop up on the property because I’m not funding it out of my pocket (although I would obviously have to if a big item hit before these accounts were built up).  Most of my properties are covered for the first year by the turnkey operator for any repair items, so it gives me a chance to get these accounts built up.  Any remaining funds, ie the free cash flow, stays in my business checking account as an additional buffer.  Eventually, when I have my reserve accounts at a certain level - probably $10K/property, but I’m still trying to figure this out - I will then use a portion of the excess in the business checking account as a down payment towards the next rental.  

I’ve also heard a rule of thumb of holding 3-5% of your total portfolio’s value in reserves (from someone who has a sizable portfolio).  

For me, for now, I like my system but I may modify it in the future.  I don’t claim to have it all figured out, but it’s working so far.  

[Tyler Smith]

@Allan Smith yeah that’s definitely a good idea thank you!

[Tyler Smith]

@Mark S. I’ve heard the 3-5% reserve rule also it just seems a little minimal for me personally. My other idea was to basically do exactly what you’re doing with your system. I may give that a try. Thank!

[Brian G.]

@Tyler Smith imo $10k minimum at all times no matter what even on one prop. You can blow through that easily. One drawn out eviction and turnover that needs extra work will do it pretty quick. I’d want at least $25k in reserves once I own 5 properties. Not sure what to do beyond that. Check back with me in a couple years!

[Allan C.]

@Tyler Smith you only need one bank account to manage everything that you are doing at this point. The key is to have very reliable and robust systems of accounting. You do not need more than one account until you start having more partnership structures or LLCs.

[Tyler Smith]

@Brian G. That is pretty much my thinking thinking right now. Id rather error on the conservative side to where a major issue or 2 doesn’t have me scrambling.

[Tyler Smith]

@Allan C. That is a good point. I have a monthly P/L spreadsheet that I keep for my tax purposes that should tell me everything I need to know. Thanks for responding!

[Terrell Garren]

Simple works for me - 21 SFHs, 1 checking account, 1 spreadsheet, 1 LLC, 1 umbrella policy, 1 Ford Ranger, 1 cell phone, 1 Cozy account. Usually around $20K in reserve. Life is good.

[Jon Kelly]

@Tyler Smith easiest to have max of 1 account per property, and you may find that having 1 account for all properties is even easier. For reserves, you could start with $10k per property, but as you grow you'll find you won't need $10k per property at all times. For example, if you have 10 properties, maybe you keep $30k in reserves at all times. The chances are very low for large CAPEX items on all properties within the same year

[Joe Splitrock]

Originally posted by @Terrell Garren:

Simple works for me - 21 SFHs, 1 checking account, 1 spreadsheet, 1 LLC, 1 umbrella policy, 1 Ford Ranger, 1 cell phone, 1 Cozy account. Usually around $20K in reserve. Life is good.

^^^ this is exactly the way you want things. Complexity takes time, adds expense and increases opportunities for mistakes. I have also observed with CAPEX that it doesn't occur evenly. In other words out of 20 properties, maybe two or three may have large CAPEX in a given year. Many properties can go years without any expenses. One good reserve account can handle multiple properties fine.

[Nicholas U.]

So I try to structure my accounts into different manners.  

1) I have 1 main account for each property.  In it I try to keep a minimum level for mortgage and maintenance for year.  This depends on property value and other things.  Roughly a max of $5,000.00 per property I try to hold.  This maybe a lot but it is very safe.
2) I have 1 CapEx account. The reason for this is that I view CapEx different from general maintenance and want to track it differently.
3) I have then account for future savings for purchases.  

This is a simple way of keeping track of each property for tax purposes. 

[Tyler Smith]

I appreciate everybody’s opinion thanks for responding.

@Terrell Garren @Joe Splitrock so 3-5% of property values for maintenance in a checking account as well a CapEx account with $10-$15K should be sufficient for starting out

[Calvin Ozanick]

Here in Wisconsin, I tell my clients to budget 22% of the GCMI towards those expenses. Most of them keep them in 1 account and just keep those running. However, I have worked with people who keep separate accounts and they tend to be some of the most organized people I have ever met. To each his own I guess!

[Joe Splitrock]

Originally posted by @Tyler Smith:

I appreciate everybody’s opinion thanks for responding.

@Terrell Garren @Joe Splitrock so 3-5% of property values for maintenance in a checking account as well a CapEx account with $10-$15K should be sufficient for starting out

 If you are just buying smaller properties, more than enough to get started. 

[Terrell Garren]

Originally posted by @Tyler Smith:

I appreciate everybody’s opinion thanks for responding.

@Terrell Garren @Joe Splitrock so 3-5% of property values for maintenance in a checking account as well a CapEx account with $10-$15K should be sufficient for starting out

I'm not sure I get the reason for multiple accounts, but to each his own.  I agree with Joe, the reserve amount is more than satisfactory.  You did a good job identifying two of the most expensive repairs for an operational property - roof and HVAC (in my experience).

[Matthew Terry]

Because of the situation we are all in right now, I keep 6 months of PITI + $3K in reserves for each property. I have a separate LLC, EIN, and operating checking account for each property plus an umbrella policy. The cost is negligible, but it does increase paperwork and you have to be well organized. As long as you have good bookkeeping and your properties are all owned by an LLC which are each owned by an LLC that you personally own, a CPA only charges you for the main holding company you personally own. Stessa is great tool to organize your portfolio because you can upload your EIN and Articles, policies, leases, etc to the cloud and attach to each property and link all your bank accounts for automated bookkeeping (mostly). I'm in the security industry and I've seen people who ignore low-risk\high-consequence events destroy their lives and businesses when they run into bad luck. The extra paperwork is well worth eliminating the risk of a lawsuit taking out my entire portfolio and potentially my personal assets.

I keep the minimum amount needed to avoid fees in each checking account. I keep reserves of all properties in a Vanguard low interest, no risk account so at least it isn't just sitting there losing value to inflation.

I target homes built after 1960, 3 bed, between 900-1200 square feet so my reserves make sense. If you are investing in much older homes that haven't been renovated, or larger homes that require larger capacity and more expensive mechanicals and roof sizes, etc $3K might not be enough. 6 months of PITI might be overkill, but I consider it savings account as well. When things seem to settle down and I feel there is less risk of a major downturn, I can reinvest some of those reserves and keep just 3 months, as an example.

[Account Closed]

@Tyler Smith

No need to add so many layers of organization for a smaller portfolio. Just understand the cost to replace or improve the components of your property (as you very well seem to), and when they will likely need replacement. Keep a total reserve in some account that covers it. When the portfolio grows bigger and bigger, and it becomes hard to track, start creating a system to monitor and make adjustments to your reserve. Easy money. 

As far as 10k per 100k SFR... sounds plenty to me but it depends on each property's cosmetic condition, tenant situation, any anything else that could reduce expected income or increase expected expenses! If you're going to rule of thumb it, be extra conservative.

Now go give yourself a reason to build that system :)

[Nick Barlow]

@Tyler Smith I think of reserves as one major repair and 3+ months of carrying costs (mortgage, utilities, insurance, security system, etc) per property. For me, this system lets me sleep free at night.

Covid is the only time in the last 2.5 years (my RE investing timeline) that I had a unit vacant more than 6 weeks. It’s usually about 3 weeks vacancy in my market if I don’t have to do any major renovations. 3 months reserves in expenses will be too few for some, and abundant for others, depending on risk tolerance.

Congrats on the new purchase!

[Reginald Ross]

@Tyler Smith

I keep $1,000/door and replenish as needed.

[Tyler Smith]

Thank you everybody for responding, I really appreciate your opinions! Good luck and continued success!