If you’ve been able to avoid major repairs on your rentals, pour yourself a big ole’ bowl of Lucky Charms, and count your blessings. The odds of having little to no repairs to do on your properties, especially the older ones, are as good as me getting a date with the Queen of England. But don’t get too cocky and comfortable. Sooner or later, a water heater’s gonna go or you’ll need to do some major plumbing or replace a roof. What about a property repair fund for scheduled and unscheduled maintenance?
The question is – are you prepared?
Property repairs are inevitable, no question about it. So if you haven’t started a reserve fund, you deserve a slap up side the head and that “I’m so disappointed in you” look that your parents used to give you when you used your little sister’s beloved Cabbage Patch Doll, Maggie Genevra, for target practice like Sid from Toy Story. I’m always shocked, however, to learn how many landlords are unprepared for major repairs. I’m always shocked to find that most landlords are living on every penny of the cash flow from their rentals. They’re milking those cash cows for every drop. They think “it won’t happen to me” or “I’ll have plenty of time to save up”. But if you’re going to be a successful property owner, you have to expect the worst, and be prepared to pay up when problems arise.
If you don’t have one, you’ve got to start a dedicated repair fund, and the sooner the better. It should be set up when you secure your first rental. Put a portion of the monthly rent (I would recommend 10% – 15%) into the fund, and watch it grow. See where the wind blows you. If you’re swamped with repairs, beef up the percentage. Just remember why the money is there, and keep your hands off of it. You’ll be tempted to spend it on other things when times are good and you’re not being haunted by repairs. But don’t do it. Save, save, save. Trust me, there will come a time when you need that money.
So what about a line of credit? Sigh…..many people rely on it to get them through times of major repair, but many credit lines have been cancelled. Once you start relying on the devil’s plastic, the interest rates start piling up, and before you know it, you’re in debt up to your ears, on your way to a financial meltdown, and you’re looking at years before you’re able to dig your way out of credit card hell.
What About a Capital Expense Budget?
Capital Expense Budget is the fancy way of saying “oh crap fund”. A capital expense budget is a one-time amount that you should set aside each time you acquire a property to cover major expenses later on. Each time you acquire a new property, ask yourself where the weak points are. What things will need repair in 3-5 years. Are there quick and easy repairs that you can do immediately to increase the property’s value and up the rental fee? Check out the roof, the deck, appliances, flooring, and paint, and do not underestimate the power of landscaping and curb appeal. It goes without saying that a home’s outside the the first thing potential renters will see. The outside will leave the first impression, so if you hesitate to invest in attractive landscaping – don’t. Hopefully, you have a decent contractor in your corner, so ask him or her to help you check these things out before you make an offer.
You’re smart. So do the smart thing. Be proactive, and prepare for unexpected expenses. Otherwise, you’ll find yourself panicked, desperate, and running around like a chicken without a head trying to find cash in the darndest places. Worse yet, you’ll be banging on the doors of everyone you know, asking for money like some strungout fool….well, just see the picture. And that, my friends, is not a fun place to be. So do your due diligence. Save your dough, and this will save your butt when times get tough.