How much do you set aside for Maint/CapEx/Vac. (NOT Percentage!)

Question

I know a lot of people on MF use anywhere from 20-25% set aside between Vac, Maint and CapEx (trio) which is fine. My question is, is there a level you are comfortable setting aside? Let me explain via an example.

Let's say you purchase a multi fam and the Gross annual income is $100k. So you should set $22k per year for this trio. After 3 years you have accumulated ~18k (22k minus capital spent on the trio per year) at what point do you stop adding to this "fund"?

I originally was thinking after $30k (let's assume for the most expensive cost replacements: a roof, kitchen, parking lot, etc.) anything above that would be allocated elsewhere (reduce loan, investor debt, income, etc). And as things come to surface let's say a problem tenant. In this example, it costs you $4k in lost rent, legal fees, apartment clean up and  paint. That fund is now reduced to $26k. You again begin to build that fund up to $30k.

• 1. Is there a professional term for this "fund"?
• 2. How do you judge exactly how much cash you set aside for this trio?
• 3. Is there a term for this "trio"

I rather use the correct terminology, so thank in advance for corrections. If I'm not explaining myself clearly please let me know I'll try and re-word it.

Thanks in advance!

•

Jaysen Medhurst · Answer

Hi, @Gaspare U., the "professional term" is "reserves." This can cover repairs, CapEx, professional fees, etc. It can also be used to keep cash flow consistent during vacancies, which is really a loss of income as opposed to an expense (even though we often classify it that way).

How much is really more art than science. I've seen formulas before $XX / unit, but I think there's a lot of variance based on locality, asset class, and efficiencies of scale. What works for someone with a 24-unit complex may not work as well as someone with 24 SFRs. Some investors just focus on having "access" to the funds when they're needed. So they will keep a minimal reserve, but have an open HELOC that they can tap when a large expense arises. They then pay off the HELOC using cash flow.

I've never heard a specific term for the "trio." Vacancy is a loss, repairs are an operating expense, and CapEx is just that.

Gaspare U. · Answer

@Jaysen Medhurst

Thank you for the reply! Ok so I’ll use reserves going forward to describe that pool of cash.

Are you able to give an idea on what you feel comfortable with for reserves?

Anyone else wish to share what they look at when deciding on a proper amount for reserves? Perhaps offer a recent example.

Thank you