Rental Repairs

[Stephanie D.]

Hi -

I recently closed on a two unit which are ocupied.  The inspection indicated that I need several repairs including the replacement of chimney liner and cap (est. cost/labor $1,000) and gutter guards (est. cost/labor $300).  I would like to start making those major repairs asap.  However, I am concerned with using all the cash that I have netted so far ($1300).  Is there a rule of thumb for funds to be held aside on rental?  My mind keeps thinking that I am in this to make money and not to lose.  Besides if the tenants aren't complaining, then why should I rush.  I really do appreciate any kind of advice.

Thanks,

[Peter Mckernan]

Hey Stephanie,

So there some schools of thought on this topic and I believe Podcast 37 goes over it as well; however, you want to keep money in reserves for maintenance. While calculating your operating cost you should factor in vacancies, maintenance, insurance, taxes, and PM (if not doing it yourself). 

If I were you I would work on the rain guards first since it's the middle of the summer and the fireplace will be the last thing that needs to be used. It is also a lower cost and you can save to a good amount for the chimney. 

Below @Jon Holdman explains the 50% rule and the 2% rule.

"The 50% rule (expenses = 50% of gross scheduled rent, expenses mean actual operating expenses, capital expenses, and vacancy) is discussed in several other recent posts, so I would rather not take up that subject here.

The 2% rule (rent must be 2% of the purchase price) has several assumptions. One is that it tries to get $100 per unit. It assumes SFR type financing (e.g., 30 year note, not 20 year.) For a 30 year, 6%, 100% note, it is exact for a $25,000 unit that rents for $500/month. Expense are $250/month, payment is $150/month, leaving you $100 cash flow. At 7% loan rate, it works for a $30,000 unit that rents for $600/month.

With a 7%, 30 year loan, for a $100,000 house, you only need $1525/month in rent to get the same $100 in cash flow. That's 1.53%.

If you go to cheaper units and lower rents, you need more than 2% to get the same $100. Your rents average $412. Take out 50% for expenses, and you're left with only $206/month NOI. If you want $100 for cash flow, that leaves only $106 for debt service. That will cover about $16,000. That's a rent percentage of almost 2.6%. At 8% and 20 years, you can only cover about $13,000"

That was an example given by @Jon Holdman 

Hope this helps @Stephanie D. 

Peter