Rental Property Investor · Cranford, NJ · Member since 2019 · 245 posts · 148 votes
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.
Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
6y
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.