Help with budgeting maintenance, capex, and vacancy for a SFH

[Austin Irwin]

Hello BP community,

I was hoping for some insight regarding budgeting for maintenance, capex, and vacancy for a SFH in Shippensburg, PA. This is my first rental, so I am a newbie. I have read that a popular rule is 5-5-5% of gross rent or something similar.

To give a little background, this is my former primary residence of five years.  The house rents for $1,300.  The market value is around ~180k but this is due to appreciation, not my purchase price five years ago.  The home is very basic: electric baseboard heat, no a/c, not many bells and whistles that will need to be maintained.  During my residence there, I took care of many capital/improvement related expenses such as new roof, new garage doors, etc.   Even without being able to look in a crystal ball, I can reasonably foresee that my only anticipated expenses in the near term will be wear and tear from tenants, appliance replacements, and a well pump eventually.

So my questions to all of you with much more experience than I are as follows:

1.  Would you see this 5-5-5% of gross monthly rent being adequate for upkeep and vacancy on the property?

2.  Without trying to overcomplicate things, for bookkeeping purposes do you continuously allocate these funds to these three buckets regardless of whether you ever need to tap into these funds?  For example, let's say I can go three years without a vacancy.  Do you still continue to allocate the 5% to the vacancy bucket every month because you know that eventually you will need to tap into it?  I can keep allocating if it would be prudent, but I don't want to tie up capital that I could redeploy elsewhere.

Thanks in advance for any insight!

[David Lee Hall, III]

"Allocation"
-> So if you look at Profit First, you could use the bucket method there and set up savings accounts for each bucket. I am lazy. I have a single savings account for these reserves that I dump into. You should have a seperate one for rental deposits in PA. 

What I like to use (though I don't always follow it) is:
Vacancy: Either 8.5% (1 month a year) or 4.25% a year (figuring you will have vacancy of a month over 2 years of leases, so half a month per year)
OpEx (Maintenance): This is more based on the age of the home and if I rehabbed it prior to leasing. If I did not rehab everything and it is pre-modern code (so built before 1980ish) I will allow 10% because I am going to have more maintenance. That said, I usually rehab too much unless I inherit a tenant. If I do everything I will use 5%. 
CapEx: 10% for an older home is safe and 5% for a newer build. Really, this is one you should figure out per property not use a random general percent (at least until you have lots of properties where you can rob Peter to pay Paul). Take a serious look at what components will need to be replaced: HVAC, Roof, Windows, etc. Figure out when in a 30-year mortgage (or 20 etc) you would need to replace these items. Ballpark the cost, then realize that the *goal* of the Fed is to have 2% inflation a year, and plug that cost in a calculator to see what say a furnace would cost in 15 years based on the plans of the powers. Now you will know you need windows in 15 years, a water heater in 5, a furnace in 12, etc. If you sum all of those costs and look at the last replacement date, you can now figure out you need to on average save $2,400 a year to meet the needs of your structure over the time you calculated. That is $200 a month you need to save, which is 15% not 5 or 10. This is why taking 20 minutes to determine what you are going to put in and when on CapEx can be very important. On the flip side, you could say everything will be good for 10 years and you are going to sell in year 9 so you don't have to address them. In this case you may only save a minimal amount for emergencies.

So my basic is 4.25% Vacancy, 5 or 10% OpEx depending on condition, and a variable amount on CapEx depending on rent roll and age of home components. 10% can be a safe number.

In regards to continuing to add to say the Vacancy bucket, that is a personal choice. I focus on long term tenants so honestly that isn't a big item for me. The key is twofold: having money for turnover and having money to pay the bills when there is no income. You could simply have a reserve per house which is actually what I switched to when I realized I provided homes folks weren't jumping to leave. $5k per SFH and $2.5k per unit of a MFH (which I am getting my first in about 3 weeks).