6 month "reserves" vs capex/maintenance/vacancy

[Nilusha Jayasinghe]

Hi all,

New to real estate investing, looking to invest in a small MFH in Chicago in the next few months. I'm trying to get my numbers together and have a question about reserves. 

I've seen the recommendation for X amount of months (let's say 6 months as an example, so PITI x 6) of reserves for emergencies. However, I've also seen investors account for capex/maintenance/vacancy in their deal analysis using percentages of gross monthly rents and considering factors like the age of the home. So my Q is: is capex/maintenance/vacancy part of these emergency 6 month reserves, or should it go into a separate pot that builds up over time? From what I've read, I feel like it's the former; I would just use those percentages for deal analysis but when the capex/maintenance/vacancy expense actually comes up, I'd just pull from my 6 month reserves.

Would love to find out if I'm thinking about this correctly. Thank in advance for helping me get this clarified! 

[John Warren]

@Nilusha Jayasinghe this is one of the most confusing parts of this business in my opinion. When I analyze a deal, I try to account for ongoing costs by using percentages or costs per unit from other buildings I own or manage. When I own a deal, I personally keep around $1500-2500 per unit in reserves so we are in a good position. Everything over that I will distribute. I think this is way simpler and more "real life". If a building dips a bit low due to a repair, then I don't take distributions till we are in good shape.