How much to set aside for Cap Ex, Vacancy, Repairs, etc.

Question

After doing mostly fix/flips, foreclosures, tax liens, I'm looking to buy my first buy and hold rental. I've been running the numbers and typically use 5% for Cap Ex, Vacancy, and repairs, which I think are the numbers that @Brandon Turner uses on most webinars. Recently however, I saw the Bigger Pockets video How to Analyze a Multi-Family Rental Property | Deal of the Day | Lewiston, Maine and in it, @Dave Meyer uses 10% for each. I know it's probably just a matter of opinion, but it feels like you could never find a deal that cashflows enough to cover this much reserve and generate a profit. So I'm wondering, what do most people set aside for these expenses?

Nathan Gesner · Answer

I should probably write a blog about this because it's a good question that is asked often.

The answer is very personal. The vacancy rate in a B-class neighborhood in Cleveland can be very different than my local market in Cody, Wyoming or your market in Connecticut. Maintenance and capex will vary depending on the age/condition of the home, class of property, and quality of tenant.

Other factors to consider:

• Your current income. If you earn $300,000 a year as a heart surgeon with average financial discipline, replacing a $10,000 roof will be easy. If you are a blue collar worker that lives paycheck-to-paycheck, a $10,000 roof could kill you.
• # of units. If you have one unit and the roof needs replacement, the rent won't cover it. If you have 100 units, you could take the cash from ten of them and pay for a roof that month.

The general rule-of-thumb is that you set aside 10% for each category. I recommend you follow that process until you have a better idea of your personal needs and tolerance. Then you can adjust up or down accordingly.

Rylee Knox · Answer

I use 5% for vacancy, and 10% for CAPEX. But it really depends on the property. For example, 1 bedroom units tend to have higher vacancy than 3 bedroom units and higher end units tend to have less vacancy. additionally, CAPEX is on a sliding scale from 5% to 15% depending on the age and condition of the building. But I also agree with @Joe Villeneuve. If you have enough reserves or access to funds (LOCs) you don't necessarily need to withhold that percentage every month, however, it is important when analyzing deals that you have a realistic expectation of the cash flow. So you're definitely on the right track. When in doubt, I estimate conservatively then hope to outperform my estimates. Best of luck to you!

@Douglas Curtiss

Karen Bickford · Answer

@Nathan G. Well said!

Roland Jerez · Answer

@Douglas Curtiss the percentages are dependent on the level of repairs already completed prior to getting a tenant. If the property needed minimal repair initially and the home is older, it’ll probably be in your best interest to add more a month to repairs and capex. You wouldn’t want a years worth of cash flow to be depleted with one huge repair (ie roof, hvac).

PM is 100% on you as to how much hands on you want. I’m not saying forget about the property. I normally factor in 11% for PM because every time the PM turns your property an additional fee is applied.

Tyler Bushey · Answer

I have a separate bank account for every property, that way the money just accumulates in the account for all of the vacancies/repairs. If you have the discipline to ignore the money it should work well.

Pete Hornstein · Answer

@Douglas Curtiss

I’ll throw my two cents in...

Management I always put in 10% bc I may want that option in the future and my time is also valuable so if I’m working more I want more return.

Capex and repairs float for me. I use separate items and usually capex is about half of repairs. Some rough properties I bump up the repairs to 12-15% but usually I’m around 10%

So management 10%, repairs 10% and capex 5%.

Vacancies can slide some but not a whole lot... for me... 6-8% there usually

Calvin Ozanick · Answer

I think when buying, you should assume the worst, and hope for the best. I always set aside 10% for management, maintenance and vacancy. Then I will set aside 7% for CapEx, which allows me to have just about any expense covered under those categories and percentages. If you over budget, you can always re-apply those funds to another category at year end.

Joe Villeneuve · Answer

0%. If you want to know why, see the result in $$$ you get when you hold back whatever %%% you think will work for this.

Then, calculate the costs of all the items this is supposed to cover.

Do you have enough money, not %%%%, enough MONEY to cover what this is supposed to cover?

This is why I say %%%% e dangerous in analysis. They lie...and are misleading at best. They give you a false sense of security. The better way of covering yourself is to get a LOC.

How much to set aside for Cap Ex, Vacancy, Repairs, etc.

How much to set aside for Cap Ex, Vacancy, Repairs, etc.

Most Popular Reply

9 Replies