What % of rental income, if any, do you put away for future repairs?

Question

Hey guys, do you put away (save) a certain amount of rent income for future repairs? If yes, how much? Do you have a separate business savings account for that? Thank you, Edita

Wade G. · Answer

All of it. I have a real estate account that is different than my everyday account. All the rent payments go into that account. When that account grows to 30k or so I then entertain the idea of buying another unit. I like to have 20k liquid at all times because eventually worst case scenarios are going to happen and you need to have the staying power to stay in business. In my opinion there really is no real income from rentals until you are way, way ahead with reserves in the bank.

Oliver Trojahn · Answer

Rob and Steve. Very great question. I guess in reality my entire business LLC checking account is for repairs (like Wade said). I don't necessarily allocate anything specifically for repairs as I don't see the need. If something breaks, I fix it with money from the business checking account. In reality, i do leave about 1k in the account when putting the funds towards another property. For reserves etc.(which is needed for getting the loan) my personal checking account has enough to qualify. For someone doing this full time with no outside income they wouldn't qualify for the loan.

James H. · Answer

I have little experience with only one rental and am looking to buy another. I feel that after all out of pocket costs for the new unit (DP, closing, repairs, make ready, etc) I would like to have at least 4,000 or 5,000 of unencumbered cash. The rental I own is paid for so there is no mortgage to pay if it goes vacant. Taxes and insurance are only about 180/month (and I pay taxes lump sum at the end of the year). The next rental (conversion of primary) will have a PITI of about 450/month and gross rents at 700-750/month. So, in all, 4-5K plus a credit card is enough IMO. Heck, truth be told, I'd probably let it slip down to 1500 plus my CC if that's what needed to be done to make a DP on a new units. After a couple months of nail biting, I'd have it back up to a comfortable amount combining net rents and personal income. 60% of the vested portion of my 401K works fine to cover reserves for the bank. I think you need to have more money available as you get more units as the risk increases up to a point where a pool of money shared amongst all the units works fine. My goal is also like Wade Guy's in that I would like to be at a point where I have about 4 rentals and a base of 20K in reserves with only additional money to that for new purchases. Of course, truth be told, I would probably feel okay letting my cash reserves temporarily sink to around 8K if I had 4 rentals and an opportunity to get another one. It would also depend on how my tenant situation is at the time and what condition the properties are in.

Jeff S. · Answer

Edita D. Here is an example of a SF built in the 1920s over 20 years total. It includes significant repairs and rehab in year 13 along with long-term cleaning and maintenance, repairs and cap expenditures. You should be safe with these numbers since your area is typically newer. http://www.biggerpockets.com/files/user/Jeff1/file/sf-rental-income-and-expense-20-years

Shaun Reilly · Answer

Good question. I'm like many where I just pay for repairs out of my general opperating account. When evaluating a property I will budget 10% for this (unless there is a good reason to make it higher or lower) so I SHOULD have the money when needed. However this is for more of the simple small repairs that come up. I do try to actually put away an ADDITIONAL 10% for CapEx/major repairs (roof, furnace/boiler, major repairs on a turnover...). My basic philosophy is I don't think I need to squirel away $150 for a boiler servicing but I don't want to get caught without the cash on hand if I need $4-6K to replace one.

Erik Kubec · Answer

Hello Andrew T., You sound like you have a similar profile to my wife and I. We bought our first rental property in Dec of 2011, and we will close on our 4th in about 3 weeks. Technically, one of those properties is in my IRA. Anyway, the lenders have been 'doing the math' and with each successive purchase, they will require more in reserve. Our first couple of properties, I wasn't terribly concerned as my wife and I both have day jobs. However, with each successive property, the risk-impact goes up, so likely we will have to set aside more and more in our bank account. In fact, this is already impacting our financing choice as we have elected to go with 20% down versus 25% down on this next one so as to have $5k extra in reserves. -e

Harry M. · Answer

We use a similar approach to Wade Guy. We maintain a floor amount of cash that we never go below, and once there is enough that we can afford a down payment on a new property without going below the floor, then we consider ourselves ready to go for it. Our plan is to increase the floor amount by roughly 6k (about 6 months PITI) for each property that we buy. We don't allocate a specific percentage to repairs and CAPEX - just make sure that we have an adequate amount of liquidity at all times. In the future, when there are more properties, we will break things out more, but at this stage of the game (2 properties, 3 units total) it seems like overkill. We do track everything that comes in and goes out very carefully - there's a big difference between not breaking money set aside into separate buckets, and not having a good idea of where the money that is already spent went.

George Paiva · Answer

For my properties I use a mix of what was mentioned above. I use a Business LLC Checking account for all repairs, Draw about 10% for my mgmt duties then keep the rest for repairs and eventual purchase for additional property. I also project out detailed annual cashflow and do what Joel mentioned above as far as lifecycle of equipment or repairs per property. For example, if I know a new roof is needed in 1-3yrs I plan on keeping reserves in the business checking acct to satisfy that till that time comes. The key is having it all planned out and what the exit strategy with each property. I like to buy rehab multi's which I hold long term. I eventually get them updated to the point of a turn-key operation by the time they are ready to be unloaded. Then I 1031 for the next level.

Edita D. · Answer

Thanks for your comments, guys! Steve Babiak - thanks for sharing the link! So useful!

Steve Babiak · Answer

And what happens when a lender is looking to see what cash reserves you have, after you have put it all in as down payment money?