Originally posted by @Steve K.:
Originally posted by @Mindy Jensen:
Originally posted by @Steve K.:
@Mindy Jensen What works for me is to burn 50 dollar bills in each corner of all new properties, within 1 hour of taking ownership. It's my version of sage smudging. Then I set aside $1million per square foot to handle unexpected Capex, maintenance and repairs. It's never enough, but I can always sell my plasma if I need to. Owning property is expensive.
Owning property IN BOULDER is expensive.
Yes that's true, that's why I substitute 5's for 50's when I'm smudging my Longmont properties, and only allocate $500k per square foot for Capex, plus my first born for repairs.
In all seriousness though to address your post: perhaps the biggest mistake I see people making on here is using percentages or other rules of thumb instead of crunching the actual numbers specific to a property. It's especially dangerous when using a percentage of a low rent amount. If gross rent is anything less than say $1,000/mo. I'd be afraid even 100% of that is not nearly enough to meet the baseline cost to maintain a property, especially the type of inexpensive property that "cash flows" with $1,000/mo. rent. An expected $200/month cash flow can turn into a big hole that takes years to crawl out of very quickly if a couple major Capex events occur simultaneously, which thanks to Murphy's law they always do.
In my opinion the way to do it is to total up the big ticket items that may need to be addressed during the intended hold period, for example if you're planning to hold for ten years and the property is already 50 years old and in rough shape it might need 1 roof at $10k, 2 water heaters at $5k, new furnace $8k, sewer line $15k, appliances twice at $12k, driveway repaved at $9k, Kitchen and bath rehab at $20k... Let's say the total is $80k, divide that by 120 months= $666/mo. (wow, totally unintended ominous number!), plus your normal repairs, maintenance and whatever other miscellaneous **** that hits the fan of course. I've read it costs an average of $1,200/mo. to maintain a home. It's probably a lot more than most people expect which is why it's hard to make any money on inexpensive property with rent less than $1,000/mo. Literally all of that and more, most likely A LOT more, is going to get devoured by Capex over time.
I allocate $20k extra for each property when I purchase (on top of any rehab budget, and I build it into the sales price when I'm running my financial analysis, side note these are MF properties 3 units and bigger). I do this just because in my experience when I take on new properties I like to fix things. Generally I find at least some unexpected deferred maintenance type stuff that the seller didn't address, the type of thing that is better to take care of now rather than let it get worse and more expensive to deal with later. Then as far as allocating for Capex I use something like the above method, custom for each property, and have plenty of reserves held in mutual funds so I don't become an undercapitalized deadbeat landlord that can't afford to fix things or pay the mortgage when a furnace and a sewer line decide to call it quits at the same time, which just happened to me at the beginning of this year.
No way I would invest in RE with that kind of capex.
For a refrigerator, I find the best one on Craiglist for $150, I do the same for the stove. They say never to buy a used hot water heater... but hey, it‘s a cheap rental and mine went out, so let’s check Craigslist or Letgo, sure enough $175 (how does $125 cash right now sound? Good, great)! Furnace-$700, AC unit-$550 both purchased from a wholesaler of hvac in town... now to find an installer... Hey hvac buddy, any of your friends get a dui recently and get fired or anyone need some money? I got $1000 to whoever installs these, I‘d like to do $600 if you‘re cool with that, I‘m an investor... Sewer line excavated and replaced, $1500 tops or I‘ll get out a shovel myself. Repaved driveway done professionally-3kish, by why do it? It‘s a rental, pour some quickrete in the hole and move on.
$1000 or less rents work for investors all the time, but got to quit being the guy at the end of the rainbow.
