How much do you set aside?

Question

I'm purchasing a duplex for $90k and it rents for $1350 total, but I'll raise rents to $1400.

In regards to variable expenses I'm setting aside $100 for repairs (7%), $115 for capex (8%), and $70 for vacancy (5%).

The home was built in 1912 but the seller has updated many big ticket items such as the roof and flooring.

I'm just wondering if you believe this is too aggressive or not enough.

This deal meets the 1% rule easy but my Cash on Cash return doesn't hit 8% when I throw in the property management fee, water bill, and lawn care. So I will most likely manage myself.

Justin Hoggatt · Answer

Hi, @Stephen Brown!

I think you've done a good job of estimating some money to set aside and many people don't do this, spending all their cash flow as income and then not having enough when needed for a repair or issue. On the CoC, I prefer to look at the project in this way:
Ask yourself what it will take to the get the property in good shape, ready to rent, and hopefully no more real upgrades needed. I.e. Purchase price $90k, Upgrades $10k, final price $100k. With the downpayment of $22,500? (25% down) and the $10k of Capex on the property, you're all in is $32,500. Obviously these are rough estimates and there will be closing costs or other things to factor in - you're a broker, you know.

Then you'll know your real CoC returns and over time you'll realize your true investment.  The money set aside is still equity until it's used.  So, that money you're setting aside may or may not come out of operating expenses, it's an escrow of sorts.  I think you're on the right track and do what a lender does, do an escrow analysis each year and adjust as necessary.  Once you've set aside a comfortable amount (say $5k?), then you're probably good and can stop placing money aside - unless you know you're going to be doing a big remodel.

As for the charges - what are you factoring in as management fee?  I think you'll be able to self manage this no problem so I'd look at doing it yourself.  I would personally charge the tenants back for the water (by way of RUBS if it's a single tap) and the lawn care I can see as a need.

Ben Zimmerman · Answer

Personally I have all of my SFR tenants take care of their own yard, any MF I contract out to ensure that standards are kept.  If you find a reliable long term tenant in a MF that is willing to do it for reduced rent that's fine, I just don't feel like renegotiating lawn maintenance every time someone moves out.  However I would never give them my own lawnmower to use.  If there was an accident, the tenant could say that you never trained them on how to properly use the mower and try to sue.  They could also simply run off with your mower when they leave unless your contract states the make/model of the mower in question.  They could argue that since you are providing the mower, that you are also responsible for providing the gas and mower repair unless your contract is iron clad.  Simply put there's too many things to potentially go wrong when you get on of "those" tenants.... You know the ones I'm talking about.  If they want to take care of the lawn for reduced rent, let them provide their own equipment.As to the original question, your monthly savings is probably in line with what can be expected, monthly savings for future repairs is great, but the bigger issue is what are your CURRENT reserves.  I think most people will set aside some money for repairs, but may stretch themselves too thin after paying the down payment and closing costs such that if an unexpected expense pops up right away, they don't have a good way to pay for it.  There's no magic number, but I would want at minimum 6months rent + 10k in liquid/semi liquid funds.

Stephen Brown · Answer

Yeah I'll see if I can split the water bill. The good thing right now is that the whole unit is occupied by the same family. So we'll see. I really don't want to put in that much money into it to start as I know I will have to update the furnace.

Dillon Cook · Answer

@Stephen Brown

You could keep management and have tenants pay for their own water. Is it a side by side duplex? Split meters. Small upfront cost but long term you can keep rents about the same, but allow tenants to pay for their own water.

Justin Hoggatt · Answer

@Kwasi Safo-Asante, i’m sorry if I was confusing. What I was meaning to say was that I agree with the anticipation for lawn care expenses and that it needs to be covered by the landlord. You might be able to get away with having a tenant take care of their side on a duplex, but I don’t have that experience. On any multiunit properties, I take care of the lawn care and would suggest the same so that it stays up to your standards and you know it’s getting done. You could, however, add in a nominal monthly charge if you feel the need to cover this expense and earmark it as lawn care needs.￼￼￼ I’ll add caution this tactic though, so the tenant doesn’t feel like you’re charging for too many things.￼

Kwasi Safo-Asante · Answer

@Justin Hoggatt you can have the tenant cover lawn care? I just purchased a new lawn mower and i'm crediting for each time he mows the lawn. Is this a normal way of doing things? I'm completely new at this. I probably should have done some more research first. lol

How much do you set aside?

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