How much money to budget for repairs and capital expenses.

Question

So, I have very recently discovered that I have made the grave error in not accounting for repairs and capital expenditures for my rental units. I have owned investment properties for going on 5 years, currently own 18 units, and I have never encountered an issue that amounts to more than a few hundred dollars to repair or replace. Maybe I've just been lucky, but I am a very hands on landlord and I feel like that keeps my problems to a minimum. However, I recently had to replace countertops, floors, and some exterior rot on facia and soffit...all of which set me back several thousand dollars. Usually this would not be a big deal since I keep more cash reserves than I would ever need, but I have recently spent much of my reserves on downpayment on another investment property and improvements to a mobile home park I purchased a few months ago.

So my question to all is how much do I need to budget for out of each unit for repairs and capital expenditures? I have read that some set aside 10%, 15%, or even 20%. It seems like it may depend greatly on the age of the home and type (single family, mobile home, apartment, etc.)

Interested in any feedback!

So my question to all is how much do I need to budget for out of each unit for repairs and capital expenditures?  I have read that some set aside 10%, 15%, or even 20%.  It seems like it may depend greatly on the age of the home and type (single family, mobile home, apartment, etc.)

Interested in any feedback!

Cassi Justiz · Answer

I'm weird in that I don't actually *budget* for repairs/cap-ex. My process is that I save 100% of my cashflow until I have enough to pay for a cap-ex expense ($5000ish) per property. For me this also amounts to about 6 months of expenses per property which my lender really likes to see. After that metric is hit, then I look at reallocating cashflow towards some down payments or keeping it in reserves. I basically want to know that my debt can support itself before I take on additional debt. :)

Jake S. · Answer

Hey @Corey Block! With our SFH and small multifamily properties, depending on the age and condition of the property, we set aside anywhere from 8 to 12%, 10% being my standard

William McGuire · Answer

@Cassi Justiz I am glad that I am not the only one that is working this way! I save all cashflow until I have met my number for each property, all reserves kept in the same business account. My number is 2-3 months of expenses (P&I, Insurance, and taxes) plus 3-5K, depending on the size/expected future CapX, per property. I want to get to 25K for my first 5 properties.

@Corey Block I came up with these numbers with the help of more experienced folks, but don't have the personal experience to back it up. Just wanted to share my recent education:I am new, but eventually will hit a cap on what I need for reserves. It is unlikely I will need to replace 5 roofs all at once, and if I did it would be an insurable event. For me, once I have more than 5 units it is going to be enough to cover my overall expenses (P&I, Insurance, and taxes) for 2-3 months, plus a roof for every 1 in 5 properties that I own at that time, which is about 10K in my area.

For my first 5: 5K (expenses) x 3 + 10k = 25K

Being new, this basically equates to 5K a property anyways but will shrink as I get more properties. You might already be below that with 18 units.

This is too conservative for some, not conservative enough for others. As someone else already said, you have to factor in how a lender will see your numbers as well.

I hope this helps,

-Will

Dennis Cosgrave · Answer

It all depends on what your long term objectives are. If your plan is to buy and hold then you should set aside reserves. One rule I always used was to save the cash that I saved on taxes writing off depreciation. Over time, I always had enough cash reserves left over at the end of the year. I think you made a mistake taking cash out of the reserves to buy another property. You never know when a major repair or replacement is coming. If you have a larger reserve than necessary, you can take some out. If you have owned rental property for 5 years you should have a pretty good idea what your annual maintenance and repairs expense should be.

If your plan is to buy and flip, then you look at the purchase price plus the actual cost of repair and renovation. Compare that to the ARV at the completion of the renovations and determine what profit there will be, allowing a cushion for unexpected issues. If the renovation cost leaves little profit left, either negotiate a lower purchase price or find a better deal.

Alexander Lang · Answer

I second the method that @Cassi Justiz practices. I typically save around 15% or so to put towards reserves, but it really depends on the property. I didn't start keeping any cash flow until I built up around $6/7k. Even at that, I am now just saving the cashflow to put towards the next properties down payment or its reserves.

Corey Block · Answer

@Chris Coleman I usually do pay cash for these expenses, since they are typically pretty small...until this instance.  As for my reserves, I keep more than I probably need to but my lender has never questioned my cash reserves.  I have really never thought that much about it as most of my property is very recently renovated.

Thanks for the info, I will start with 10% for now and see where that gets me.

Chris Coleman · Answer

@Corey Block if the rehabs are fairly new, within 5 years, and therefore you should not have to worry about any major deferred maintenance issues, then 5% Maintenance + 5% Vacancy is customary.  As the years go on, either major maintenance issues have to be addressed, or the Maintenance Savings needs to increase while you wait on something to break.

But are you paying all cash for these? I ask because Lenders generally want to see 6 months of rent in reserves.

How much money to budget for repairs and capital expenses.

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