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Updated over 7 years ago,
Treating Expenses as an Insurance Model
Hello all,
I'm fairly new to this real estate investing game. Family has invested in rental properties for years that I've been heavily exposed to, and now doing my own research to get into it myself (and learning all the things my family did wrong).
One idea that came in my head was the concept of treating your expenses like an insurance model, and I'm curious if anyone else has tried to go this route.
Let me explain what I mean:
Let's say you have 20 rental properties in your portfolio. Each one, you are setting aside 5% Repairs, 5% Vacancy, 5% CapEx each month. Now I know not all properties are the same, but I would assume somewhere in your portfolio you might have a house thats had the same tenants for 5 years, so your vacancy budget may be significantly over what you need... and then another property might have awesome tenants that don't bother you for repairs for minor things, or things they know they broke and fix themselves, so you might have a repair budget thats sitting unused.
In a home owners insurance model, instead of having a premium that, over the life of a policy, pays off the entire value of the house in the event something happens, the premium contributes towards a pool of money that will be used for the rainy days when something goes bad. Essentially, you're making the assumption that not every house is going to burn down and need a pay out.
Similarly, has anyone attempted to make the assumption that not every house is going to be vacant once a year, or have the need for repairs every month or few months. Instead of putting away 5% a month on each of your properties, maybe change that to 3% and have a joint pool of money for your portfolio that is assigned to pay for Repairs, or Vacancy, or CapEx on each of your properties.
The point of this model is accepting a level of risk in order to increase your aggregate monthly cash flow of you portfolio.
Maybe you convert to this model after you've already built out a decent balance over all your properties for repairs, vacancy, etc. Or maybe over time as you realize which properties are the "golden" properties, only those can lumped into this model, and the bad apples continue to contribute 5% into their own repairs/vacancy/capex.
Again, I'm not sure this will work, but thought it might be something that someone that may have tried it in the past can chime in on. Or maybe just have a discussion. Or maybe I'm just an idiot and I'll get shut down by everyone.
Who knows.
All I know is its something that I was pondering.
Sorry for the long post guys. Let me know what you think!