Is it proportional to the revenue (total rents plus extras like coin laundry, etc)?
Proportional to something else?
You have to determine the remaining life for each of the major elements of the project.
For example:
Water heaters (2-10 years, depending on electric, or gas; water quality; and location (ie: outdoors, wet basement).
Roof (flat roofs leak more often than pitched) Tile roofs last indefinitely vs anything else.
Asphalt (amount of traffic, thickness, speed bump placement effect lifespan)
Exterior paint (Painted brick vs. board/batton vs. shiplap, etc.
Pool Pump
Fencing
etc, etc.
Each element has it’s own lifespan.
Estimate the lifespan, and estimate it’s replacement/repair costs, etc. and budget for that cost.
For example, if you have 10 years left on a $10,000 roof, you need to reserve $84 /mo toward roof repairs, starting this month.
You go through the entire project this way, and determine the size of your replacement/reserve budget.
Sounds like a lot of work, but well worth it.
It’s very important to have money in reserve for any expenses and repairs that will come in the future. Basically, there is really is no set money that you need in reserve, but it’s a good idea to have enough money in reserve in order to repair the expensive equipment like a boiler, plumbing work, and roof. And of course there will always be cosmetic repairs such as paint and wallpaper the walls.
I have heard a good ballpark estimate is 10% of rental rate but very dependent on the types of homes you are investing in and how many repairs your completing on the front end. The method javipa mentioned above is the correct way to ensure you don’t over or under shoot since it could be the difference between a money pit or losing the deal
A general rule-of-thumb is to have two to three months worth of the gross rent per unit.
I only have 10 units in my portfolio and I have never worried about maintaining a certain cash reserve based on the number of units that I have.
I generally know about any upcoming large maintenance and repairs so I can plan for that.
My suggestion would be to have credit facilities in place, such as a line of credit, to cover you in the event of a worst case scenario where you have a lot of vacancy and a few big unexpected repairs.
Yeah, that’s what American Express is good for; emergencies.
I suppose a definition of ‘big’ unexpected repairs needs to be made. Otherwise, I have never deliberately put aside 3mos worth of rent on a given property for emergencies. I mean, unless you own in a high-vacancy area, and can expect three months of marketing, trying to find that one tenant that has the ‘two-hundred-dollar’ deposit you want, and has been employed for, oh, say, six weeks straight!!! Then you might consider a rainy day fund to tide you over.
Otherwise, expenses on real estate kind of emerge on the horizon, and you can plan ahead. The rest are usually nuisance costs that can be absorbed in real time, such as drain clearing, and what not.
There’s a couple of plays to reduce emergent costs that anyone can consider.
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Don’t raise the rents. Once the tenant realizes he’s got a bargain, you’ll hear a lot less from him, because he doesn’t want to end up paying more rent. If it’s really low, he won’t even call to have the a/c fixed. He’ll fix it himself (probably badly, but hey, it’s not costing you anything ‘this month.’ Yay.(That doesn’t mean you don’t maintain the place, but you will get fewer nuisance calls such as, ‘my bedroom door won’t close,’ or ‘can you tighten the screws on the screen door?’
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Get HUGE deposits and charge HIGH late fees. This is usually easier to get from ‘iffy’ tenants with ‘iffy’ credit. Just saying. This is also, by far, the biggest insurance policy against skips, lates, and tenant damages, if not orneriness.
As an aside, I rarely rent to people with good credit. They’ve got options and rarely give me the giant deposits I want, and/or agree to pay high late fees. So, I prefer dealing with the ‘iffy’ customers with fewer options.
That said, it usually takes a couple of months for the ‘iffy’ tenants to figure out that the rent is ‘actually’ due on time (like the first business day of each month), and that I ‘actually’ won’t accept rent that is late, without the late fees included. Never mind I’ve got a huge deposit to tap when/if necessary for this purpose.
So, either make the rent a bargain, and/or charge high deposits. Either way, you’re less likely to find your self flat-footed by an expensive emergency, or a slew of nuisance requests.
It is important to have savings available for a budget and tools that will be created in the future. Of course, there is a truth to the lack of money that you want in savings, but it is a good idea to have enough money to be able to upgrade expensive things like heat, plumbing work, and roofing. And of course there will always be decorations like paint and wallpaper on the walls.