What do you do with CapEx money?

[Marty Gold]

I am searching for my first rental and know it's important to save CapEx money each month for big problems that eventually arise.

But what do people do with this money?  Stock market is likely too risky and bonds aren't liquid enough.   Do you just leave it in a savings account earning next to nothing for years or maybe decades until one day you need a new roof? 

Thanks

[Scott Trench]

I think that you'd be wise to engage in a fundamental shift in thinking about CapEx--at least with your first rental.

CapEx is not a monthly expense. CapEx is comprised of large, irregular expenses that need to be taken care of every couple of years (new roof, new kitchen, plumbing/electrical overhaul).

Here's an unwise approach:

"My roof is 15 years old and has approximately 5 years left. The new roof will cost $20,000, so I had better start saving $1,000 per year!" 

Here's a wise approach:

"My roof is 15 years old, and while it may get as many as ten or even twenty additional years, it may also need to be replaced in 6 months or less, as a number of unforseen problems can develop in a roof that old. I'd better have $20K, or even more, set aside in a safe bank account or other similar accessible account to handle unforseen emergencies, RIGHT FROM THE START. After all, I may also need to replace the HVAC, the plumbing, the hot water heater, the A/C, etc." 

I have just a few rentals. I don't set aside a small amount of money every month for CapEx. I set aside ALL of my cash flow for the first few months and years to build up a sizeable reserve account. When I have a large repair, I use the reserve account, and do not take cash flow again until the account has been restored from property cash flow. Nowadays, I get to enjoy a large monthly cash distribution in problem free months, but no cash flow in months with significant expenses.

Now, when you have 100 units, the concept of averaging out your CapEx expense and setting aside funds for that purpose out of cash flow begins to make a lot more sense, and I'm sure that large investors do that. But, for your first rental, you will be woefully unprepared for large expenses if they occur early on in your tenure as a landlord.