How many months after turnover are you profitable?

Question

Hey BP, I'm working on doing a full unit rehab (after the inherited tenant moved out). When we're done the rehab & get it rerented we'll conservatively cash flow 600 a month after cap-ex, repairs, etc.

Do you use the cash flow to repay the rehab costs? If so, how many months of cash flow do you sacrifice when planning how much you're going to spend on a rehab?

Bill B. · Answer

Once you have a few reserves become less important. If you have personal reserves that’s fine too. Use the cashflow to pay down mortgages or save up for the next purchase.

Last month was my worst in more than 20 years.  Full ac replacement $4200, full house repaint $2800, 2x fan motor and compressor motor rebuilds $2,000. This is spread over 3 properties. As I have a dozen properties I still got a check from the PM for almost $7,000. His is my worst month in 29 years and if I had 6 properties I still wouldn’t have had to reach in to my pocket. (Forgetting that the PM has no problem stretching repair bills over 2 months.)

If you have 1 or 2 properties there’s certainly a chance you could need to come out of pocket but back then I just used my personal reserves. Worst case scenario most vendors will take credit cards. Pretend it happened to your personal home. Most people don’t keep a reserve for repairs to their personal home.

Scott M. · Answer

You should have a solid reserve built up for your portfolio, if not, you use cashflow to fund it until you do.  Take as many months that is necessary.

Nathan Gesner · Answer

As Scott said, use that cash flow to build up a reserve if you do not already have one. How big should the reserve be? That depends on your other income, your financial stability, the number of investments, your experience level, and other factors. For a beginning investor, I recommend you build a reserve equal to 6 months of rent has a general rule of thumb.

Even after building a reserve, I recommend setting all your cash aside to accelerate savings for the next investment.

Mike McCarthy · Answer

@Cory Benhardt I account for my turnovers in two different ways. If it’s just a normal turnover with a bit of repair and maybe a few small upgrades, I just account for it as repairs & maintenance. It comes out of my yearly profit similarly in both taxes and P&L.

For significant rehabs, I track them slightly differently. They still come out as repairs or larger deprecation expenses out of taxes, but I track them separately for my knowledge. At the end of the year, I know that the major reno was $10K (or whatever) out of my profit… but I handle it as a separate line item, so there’s no confusion to myself or potential investors down the line that I ‘lost’ that much money this year. Because I see it as an investment in both the value of the property as well as for future rents.

Joe Splitrock · Answer

@Cory Benhardt turn over expense can be a landlords biggest money pit. Not only do you have rehab costs, but vacancy expense. To reduce vacancy and rehab, we have increased screening standards.

We pay rehab costs out of reserves. We try to be careful to not over-improve and sacrifice too much future cash flow. Some improvements can wear out before you are even done paying for them like carpet or paint.

Cory Benhardt · Answer

@Bill Brandt  Wow thats a hell of a month. I appreciate your feedback!

Cory Benhardt · Answer

@Scott M. @Nathan G. Thank you both. I have personal reserves that can fund the rehab. I don't have reserves from the cash flow of the property yet because we just bought in January and are working through the inherited tenants as their leases end, we'll be able to double rents. Do you use the reserves from your personal account or reserves from the cash flow over the years?

How many months after turnover are you profitable?

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