What do you budget for reserves and CapEx?

[Mindy Jensen]

Reading another thread, @Nathan Gesner said "I suspect it's in the neighborhood of 20% (of landlords) that hold reserves and even fewer that hold the proper amount."

I see a LOT of people asking how to start investing with no money (and usually bad credit) and that makes me cringe, knowing that one big repair could wipe them out.

@Scott Trench said that when he bought his first Duplex, he put $10,000 into a bank account to cover unexpected expenses. When he bought a second duplex, he put in another $10,000. When he bought his four-plex, he didn't add additional funds, as he already had $20,000 in his reserve fund and a stable job that paid well. This makes sense, and if you have an excess of money every month after expenses, the reserves don't need to be quite so well established.

So how much do you hold in reserves? What do you budget for CapEx every month?

[Account Closed]

It depends on the condition of the property.

As a rule of thumb, for a well maintained property with mechanicals & structural components NOT nearing the end of their lifespan, I budget 10% for maintenance in the specific market I invest in. This 10% is relatively high compared to other, similarly priced markets bc I do invest in a market that has rather high rents vs. the property's value. 

Truly, the best method for the over analytical, is to segregate the cost of replacement vs. remaining lifespan of each component of the property & find out how much need be budgeted yearly until replacement of that component comes due. 

Ex: if you expect a furnace to last 15 years with an 1500$ replacement cost, and yours is 10 years old when you buy the property, then you should have a total of  $1500 reserved in the next 5 years. This breaks down to $300/yr, or $25/mo. After that furnaced is replaced, you should recalculate the budget. If you new furnace is also going to last 15 years with a 1500 replacement cost then you only need budget $100/yr, or $8.33/mo.  This is a FAR more accurate method of maint/capex estimation than the good ole' pro-forma 10-15% :)

Now if you buy a property that's got some older components, you should look at your short term maintenance budget vs. your long term maintenance budget. Note that once you "stabilize" a property... replace the older stuff in the first couple of years... then your average operating costs are going to go down significantly. That $25/mo furnace budget need not worry you, it's going to drop down to $8/mo after your first 5 years. And your rents will likely increase :)