Capex reserve for cheaper props

[Edmund Li]

I am a newbie investor looking to get my hands dirty with my first purchase. I have been in search for my first rental property for a while, and I haven't pulled my trigger because I couldn't get the math right.

I've found some very cheap property with seemingly positive cash flow after P&I, insurance, management fee, property tax etc. However, the CapEx is the part I have been having trouble.

It seems that from various sources, the suggestion of capex reserve is about $180-$230 for a single family home. This makes sense since the prices for the large items don't seem to vary by a lot given the home price. So buying properties that are too cheap with lower rent seems always to be a bad deal. 

i.e. a $60k property with $800 gross rent, the $200 capex pretty much always put the cash flow to negative. While a $150k property with $1300 rent seems to be ok since the $200 capex would take up less portion from the gross rental income. Note: I am comparing properties about the same size.

So my question is, is the $200ish cap reserve pretty close to what I need even for cheaper properties? If so, does that mean cheap properties with lower rental income (even if it meets 1% rule) is pretty much always a bad deal?

[Jim K.]

Edmund, you are not off at all, at least from my perspective. The way to make money for me is to reduce those expenditures where I can. I have a duplex with 25 windows, for instance. Instead of paying a window replacement company $400 per window and then $400 for labor for each window, I would change out the windows myself, at a cost of $150-$200 per window. Once I had done that a couple times, I would certainly be in a position where I could easily ascertain if a handyman changing out windows could do a good job at it for $30/hr, at an average of 1 window per hour, for a maximum of $230 per window.

Instead of calling my plumber in when the cast iron stack cracks and starts leaking, for a $600 repair and the $200 to have the wall patched, I could do it myself for maybe $100 in materials.

I'm sure you can see how the math changes when you're willing to trade your time for money+experience, and then later as an experienced handyman you can hire and effectively supervise/teach unskilled labor to help with these jobs. Passive investing it ain't, and it's also not scalable past a certain point. But by the time you get close to that point, you're already working on transitioning out of the asset class. But while you can do it, SFR and small multifamily are a great way for a handyman to get started in the real estate game without outsized cash reserves.

What do you need to do to maximize the advantages of being a self-managed handyman investor? First of all, you don't buy properties for 60K that will rent for $700/month. You have to live in an area you can do better than that, and you have to go after properties that the hands-off investor probably can't make money on. That means C/D class, old properties with lots of deferred maintenance issues that cost you a lot less cash out of pocket/financing costs to fix than someone paying contractors through the nose, rock-solid tenant screening, and wise property management.

Again, this is not passive investment in the slightest. I'm in my early 40s. I figure I have ten more years before I'm done, and start selling to the next hungry pup to put my money elsewhere.

Nor does everyone have the skills or even the physicality to do this. I see these posts here by young ladies thinking about investing in D-class small multifamily deep in the ghetto and shake my head sadly. As my friend Dennis M. says, you have to be more savage than your tenants to make it in the ghetto, and yeah, I've done ugly things and my tenants can see them in my face. My other friend Derrick E. can tell you stories that will turn your hair white.

People WILL look down on you, especially in the beginning, and it's a very tough slog to get started. Thankfully, once you get past a certain point, you come here to BP, read stories about totally inexperienced landlords losing the s**t because of trivial issues, or saying wholly ignorant things about low-income people, or just ridiculous things about contractors ripping them off for minor repairs, and you laugh, not unkindly. You understand that yes, a lot of people are trying to get into this with clean hands and fantastic notions of how money is made and lost in real estate, and thankfully, that's not you anymore.