How Do You Handle Capex & Reserves?

Question

Hi Bigger Pockets Family,

I was wondering how everyone handles their capex & reserves. Do you save 6 months for each property AND save a certain percentage for capex each month? Do you only keep 6 months of reserves? Do you only put away a certain percentage?

Looking forward to hearing everyones response. Good luck in 2022 all.

David M. · Answer

@Darvin Johnson

I'm not a big fan of "silo'ing" out funds.  Its becomes inefficient.  you always need to keep some cash around, so I'm never fully invested (in whatever).  Lets face it, if you are keeping 6mo of reserve, do you really think all of your properties will go empty at once?  Especially in this market, then you've got some other serious problems.  Once you start scaling up and getting a few properties, things should even themselves out.  For example, after a few properties, if one was vacant (e.g. turnover), i just used the cashflow/profit from the other properties that month to cover the expenses...  'who needs reserves??'

Flexibility can be good sometimes...  I hope that helps.  Good luck.

Darvin Johnson · Answer

@Kamil Baldyga Thanks. There's no right or wrong way to do it but I enjoy hearing other peoples approach. I try to keep 6 months per property worth since that's normally what banks want. I agree about staying on top of things, I also try to make sure things are in good working order prior to tenants and try to keep the current age up big ticket items in mind.

David M. · Answer

@Darvin Johnson

Oh, another way to help with "reserves/cashflow" is see if your lender will allow NOT escrowing taxes and insurance.  If you are confident to being able to pay them yourself, that will open up a bunch of funds that you hold onto instead of having somebody else hold onto it.  You obviously want to make sure you pay your taxes, but having the pool of funds available can help with cashflow if you are tight.

Darvin Johnson · Answer

@David M. great points. I keep 6 months now because my portfolio is still pretty small but as I scale and I'm also able to have a larger overall reserve fund I won't worry so much about that specific metric. The reserves will be more so for big ticket items in the future but I'll be very conscious of using it for when the market presents an opportunity.

Kamil Baldyga · Answer

Hey Darvin! For my portfolio I like to have 5K in reserves per property. The idea being that there is safety in numbers. I do continue to set aside a little bit each month after the 5K in reserves for proactive inspections and updates/repairs. I like to address small problems before they become big problems. Hope this helps!

How Do You Handle Capex & Reserves?

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