When you have a rental property, there will be a time where the tenants move out, it won’t always be occupied, so you have to take into account the amount of money that will be spent to maintain the property. Take the mortgage, and taxes, and multiply them by six, that’s how much you need to have in reserves. Cap Ex is for larger expenses like the air conditioning unit. It’s a case by case basis for everyone. It matters how long ago these larger items were purchased because they only need to be replaced every five or ten years.
- For capital expenditures (CapEx), begin by asking yourself about the state of the roof, HVAC and plumbing.
- Set aside reserves equal to six times the monthly sum of your mortgage with interest, taxes and insurance.
- Think of reserves and CapEx expenditures as protecting your investment when things go wrong.
“It is a great idea to factor these expenses into your monthly cash flow analysis. When doing it this way, it makes saving up for these expenses more manageable, because you break it down month by month. The funds come out of the rent you’re collecting.”