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?

[Chris LumLee]

@Mindy Jensen What I would try to put in is the cost to rebuild the entire structure. Unrealistic, I know. But that would help me sleep at night.

[John Morgan]

@Jordy Train

I’m going to still stick with 50k cash reserves for all six of my rentals. I cash flow about 3k/month total combined with them right now. So usually if I have a maintenance issue I have plenty of cash to cover the expense. Last summer was just pure bad luck. 

[Jerry W.]

When I started doing this with my partner we had 0$ for reserves.  It was all we could do to scrape up the $600 each down payment to buy the place.  We found a guy replacing carpet, and much to my current chagrin put the used carpet in to replace old ratty stuff.  If a repair was needed we each coughed up the money and installed it ourselves.  My partner had been a contractor so that helped.  Later we had enough to pay for repairs, but we had to cough up about $2,500 each at the end of the year to pay property taxes.  We were trying to grow as each of us had very full time jobs.  Then my partner moved away and I had to pay a lot more for repairs as I was not handy.  We slowed down on buying, rental prices came up and we were able to pay as we go.  Then I have to buy my partner out, new loans, lower cash flow, and I want to grow again.  I finally learned to set aside money for repairs.  I did $5K for the rentals, used handymen to do everything I didn't know how to do, sometimes neither did the handymen.

Fast forward, the $5K did work but not well.  By then I was close to 20 doors.  I would have a sewer line have problems for a $7K hit then a water line break in the street for over $3K.  Luckily the checking account was fat at that moment and I scraped by.

Thanks to BP now I figure all of these things when I acquire.  I don't have $5K per house in reserves, in fact I have none!  What I do have is every year I go look at houses and see what needs a new roof soon.  I start replacing before the leaks occur if possible.  Some years I do one, some years 3 or more.  I have 2 spare water heaters in the warehouse, I have spare stoves, fridges, and a few faucets, toilets, tons of shark bites, etc.  When I buy i actually consider these things.  My rule is 5% Cap ex, 10% maintenance/repair, 8.5% vacancy, and actual insurance and taxes, and mtg payment.  I used to do as much as I could myself, but am hiring out more and more.  Shingles seem heavier carrying them up the ladder to the roof.  I also have a new trick instead of cash reserves.  I have a line of credit.  Now I use it for buying houses or even coming up with the down payment, but I leave at least $20K for emergency repairs.  That along with the spare parts in the warehouse seem to really cover it.  I sometimes run things pretty close to the line when I find a good deal or 2, but sometimes apply the brakes for a year or so when I get top heavy in my line of credit.  I run a little over 30 doors now I think, some are barely squeaking by, others cash flow well.  It is the large mix that counts.  Some are cash flow deals, some are long term appreciation plays.  Having good cash flow and a line of credit has relieved a lot of stress.  It is still painful when you get a sewer and an unplanned roof at the same time, but is still doable.

I am with @Jonathan R., I could NEVER do a $550 per month repair budget.  My rent price range is $400 to $800 per month per door.  Apartments are lowest, and houses are higher.  older houses cost more per unit and most of mine are older.  Good tenants will affect your budget almost as much as your house though.  Roll over tenants every year and repairs will skyrocket, keep the same tenant for 12 years and your repair budget is almost nothing.  Having to replace a broken window is very cheap in a old house where you buy a piece of cut glass and install it, costs an arm and a leg to do a double pane as I usually have to replace the entire window.  I have never had a furnace wear out.  I have had tons of appliances repaired by a local guy for $20 and had some appliances for 30 years in the low end ones.  I buy new or nearly new off of facebook for most.  I always buy new dishwashers.  The cost of installation is almost as much as a new one one now.  You can get a nice, but plain dishwasher for under $300 regularly.  New fridges are under $500 and often you can get a side by side with icemaker and water for $700 to $750 if you watch sales.  The China tariff thing is affecting this some.  Nice houses get new stuff, junky month to month apartments get used or repaired.

Budget for these when you buy, be proactive, have the year when you will replace the roof planned, buy the shingles now, and do it, keep spares in the warehouse, have decent cash flow, and keep at least $20K open on a line of credit.  As a last resort you can always refinance  some place that is at 50% equity.

[Anthony Wick]

@John Morgan

What was the purchase price and age of these properties? They really sound like they were a disaster waiting to happen.

[John Morgan]

@Anthony Wick

225k, 130k, 125k, 100k, and 48k. 

1993, 2007, 1959, 1959, and 1958

I wasn’t prepared for 3 foundations shifting causing cracks and stuck doors all at about the same time..but that’s normal for the Dallas area. The house I bought for 48k had a known foundation problem. I got that house for 50k under market value because it needed some work and didn’t have an HVAC system etc..just window units. I got them all about 15k under market value so I factored in repairs when I made offers on them. I was just hoping I could get a few years out of them before they all fell apart. 

[Tom Aiello]

I may be confused here, so hopefully someone can explain this to me.  It seems to me that the cash reserves people are discussing are really, really large.

We tend to hold our "cash reserves" as equity (with equity lines) in properties.  That way, we aren't sitting on actual cash in the bank, we're just reducing our leverage until it reaches a point where we can handle emergency repairs.

What's the reasoning for keeping that cash in the bank instead of putting it into the equity on the property, with a credit line to take it out again?

Can someone help explain this for me?

Thanks in advance!

[Anthony Rosa]

I will know the condition and estimated lifespan of the big ticket items and keep at least 10K in the account. Considering Roof, boiler/furnace, HVAC, Windows (except water heater) is under 10yrs old I deduct 25% for Capex, Maint and Vacancy for B class property. If i were to enter into a C class it would be 35%.