Budgeting Expenses Properly to Calculate Cash Flow

[AJ Satcher]

SO I have a rather interest question I think... Cash Flow = income - expenses, and we know you must break down the expenses further, ie. mortgage, insurance, taxes etc. I'm curious however about the budgeted expenses that I hear many investors harp on. Budgeted in this case meaning expenses that aren't going toward immediate outflows, but rather the potential of later outflows. For example a vacancy percentage, future repairs and Capex.

Now I understand the importance of having these items in the budget, however let's say hypothetically we never have a vacancy. Or we don't have that annoying repair or huge capex expense. All of that cash being stashed away in case these things happen but is never used, then what? What do we do with this cash?

Looking forward to having a solid discussion/answer on this :)

[Grant Thompson]

@AJ Satcher When we analyze deals we typically budget for these expenses in order to get an idea of the cash flow on the low end of our estimate. That being said, we set aside these expenses until we reach a comfortable reserve and anything above that gets released for reinvestment.