Rental property Calculations for newer investors

General Landlording & Rental Properties
6yFollow

Rental property Calculations for newer investors

Stephen RagerPro Member
Newburgh, IN · Member since 2019 · 35 posts · 9 votes

I'm finding myself running a minimum of two calculations per property when figuring the monthly cash flow. The reason is if you calculate using CapEx, Vacancy Rate, Repairs which are subjective(not actual) they affect the monthly cash flow. I'm holding money aside already in a fund to cover these potential expenses, maybe I'm holding too much, that could be used to purchase additional properties.

So for example, if I have $10,000 in an account to cover these, they will need to be replenished at some point.  But, initially, they won't so this affects the actual cash flow per month.

Also, is there a percentage of the properties value you recommend to have an account to fund these expenses.  For example, if I left $50,000 in an account to cover Cap-Ex, Vacancy Rate, Repairs, and I have 5 $50,000 properties.  Do I stop adding to it? Or at what point would you stop adding to the expense funding account.

It's going to be needed one day, you just can't predict the specific day.  So it makes sense to hold a percentage of liquid cash to cover the expense. 

Any articles, podcasts, books videos or links would be a great help as well. TIA ~ Stephen Rager

0Reply
23 views

Most Popular Reply

Randall AlanPro Member
Investor · Lakeland, FL · Member since 2017 · 1k+ posts · 1k+ votes
6y

We have upwards of 40 rentals and this topic also came up.   We took this approach...  if you plan on being in real estate long term, you can assume across 20 years you are going to need at least one roof and one AC replacement per property.  In our area a typical roof is $10k, and an AC is $4,000.  There are of course numerous other repairs that come along... but those two are “the big ones”.  If you divide $14,000 by 240 month you get about $59 per month over time that you need just for those two items.  

This should start to help you formulate a number for capex reserves needed. We personally budget $125 per month on SFH and $100/unit multi family properties for repairs across our properties (over $3,000 per month). So far it's worked out pretty well to cover things. My suggestion is to base your plan on a formula and adjust the formula as you gain experience history of expenses.

1Reply
See this reply in the discussion

5 Replies

Jump to latestLatest
  • Darius Ogloza
    Investor · Marin County California · Member since 2018 · 1k+ posts · 2k+ votes
    6y

    What you seem to be interested in is the concept of forming reserves for recurring yet unpredictable expenses.  Try googling that expression.  This is something insurance companies do all the time.   

    I too like the idea of simply holding a reserve for these expenses rather than withdrawing cash monthly from rents.  Just do not fool yourself into thinking that these are not recurring expenses and you will be fine.  

    1Reply
  • Stephen RagerPro Member
    OP
    Newburgh, IN · Member since 2019 · 35 posts · 9 votes
    6y

    https://www.biggerpockets.com/blog/2012-09-18-cash-reserves-long-term-real-estate-investor I came up with this and other articles out there.  Thank you for the input, the reserves need for unpredictable expenses.  



    https://www.loftyrealestate.com/property-management/why-reserve-funds-are-important-when-managing-a-property/

    This article was helpful as well.

    Any suggestions on factoring what a fully funded reserve fund looks like? Maybe I'm asking the wrong question? What are the recommendations out there for how much. Maybe a percentage of property value, should you hold per property as a reserve fund.  Once, you achieve it, you stop contributing to it. I realize this is subjective to many people. 

    In theory, if 6 months of expenses are recommended.  If that's where you are comfortable, if rent is $600 that's only $2,400 in an account, plus utilities. That's not enough to facture foreclosures, roofs, other repairs.  If I go with $5,000, it's an arbitrary number, I made up but it's double the scenario cost for 6 months of vacancy. 

    Should someone be comfortable with 6 months of the figured expenses, then stop contributing to that property and re-run the cash flow analysis?


    0Reply
  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    6y

    I just typed a really long response and my phone lost it!

    the amount of funds held in reserve depends on quite a few different factors. I don't want to write another long response and lose it. if you're interested in my take and some suggestions of how to move forward, send me a private message and I will give you a detailed response tomorrow.

    The DIY Landlord Book4.7248 Reviews
    WebsiteView Page
    1Reply
  • Noah Chappell
    Investor · Minneapolis, MN · Member since 2016 · 254 posts · 228 votes
    6y

    I'd look at your property, fix broken things immediately, then take inventory of what cap ex is on the horizon, such as new roof, furnace, windows, etc. You can then plan on how much to put aside monthly for cap ex, while putting aside a fixed amount for ongoing repairs (ex 7%), admittedly arbitrary. If you plan on a new roof in 7yrs that will cost 10k, 10k/7/12 = $119/month. Do this for all cap ex. Your initial home inspection will alert you to what will need to be done. 

    Depending on the level of rental, I'd try to make your property as tenant proof as possible. An older property without dishwasher/garbage disposal/central air/laundry will break less than one with all the amenities. 

    Just some ideas. 

    1Reply
  • Randall AlanPro Member
    Investor · Lakeland, FL · Member since 2017 · 1k+ posts · 1k+ votes
    6y

    We have upwards of 40 rentals and this topic also came up.   We took this approach...  if you plan on being in real estate long term, you can assume across 20 years you are going to need at least one roof and one AC replacement per property.  In our area a typical roof is $10k, and an AC is $4,000.  There are of course numerous other repairs that come along... but those two are “the big ones”.  If you divide $14,000 by 240 month you get about $59 per month over time that you need just for those two items.  

    This should start to help you formulate a number for capex reserves needed. We personally budget $125 per month on SFH and $100/unit multi family properties for repairs across our properties (over $3,000 per month). So far it's worked out pretty well to cover things. My suggestion is to base your plan on a formula and adjust the formula as you gain experience history of expenses.

    1Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free