Reserve cash for building maintenance

[Patrick Michael]

Pursuing my first multifamily.  Wondering what the community thinks on the optimal amount of cash on hand is for maintaining the building at time of purchase.   Thanks all and happy to be here . 

[William Whitley]

Good evening, Patrick,

My standard answer to most questions is “it depends”, and that is applicable here. It depends on the age of the property, the condition of the property at the time of purchase, the age of the major systems, the age of the roof, etc. It’s important to have a replacement reserves account that anticipates the remaining economic life of various components that will need to be replaced in the future, and forecasts what those anticipated costs will be. Then you can calculate how much money will need to be set aside on a periodic basis to be able to cover those costs when the time comes. 

If you can place those replacement reserves in some type of investment account, the interest earned over time can help leverage your investment for replacement reserves.

Appraisers will sometimes use a sinking fund factor, which is a formula used to determine the amount that needs to be deposited into a sinking fund at regular intervals in order to accumulate a specific future amount for future capital expenditures. 

Some investors may use a rule of thumb like say 15% of monthly income. The problem with using a rule of thumb is you may find that you are still short on the funds you need when the time for replacement of these CapEx items comes.

I hope that is helpful.

Bill