Are my reserves too high for a house hack deal?

[Benjamin Sulka]

Hey house hacking community, 

I've been active on these forums for a while and finally getting ready to purchase my first house hack within the next 3 months. 

My goal is to save on my living expenses and pay less than I am renting right now (my fiance and I pay $1,450 and split it). 

Since I'm relatively versed in general real estate investing knowledge, I'm aware of all of the line items to account for when analyzing a property. Being conservative with my reserves is causing a lot of deals to look bad on paper (after moving out of the property). I'm not expecting a property to cash flow with 3.5-5% down and 6.5-7% interest, but I'd like to see it at least get close to breaking after moving out. 

Here is what I'm taking for reserves (outside of location specific expenses like home insurance, utilties, taxes etc.)

- 10% for future property management 

-10% for vacancy

-10% for CapEx

-5% for repairs and maintenance

-5% for lawn and grounds keeping

-0.5% of purchase price for PMI based on my credit score

For a house hack, is this too conservative? Am I passing up on potentially lucrative house hack deals because I'm taking too much out? Despite the book being written in 2019, Craig Curelop's house hacking book describes the seemingly low reserves that he takes of $300-600 per month.

Would love a sanity check from some fellow house hackers! 

Thanks so much for your time. 

-Ben, aspiring multifamily house hacker

[Daniel McDonald]

That does seem pretty steep and tough to do these days. I think a lot of people are going 2-5% these days. But it really is whatever makes you sleep at night. 

Could you self manage? That would knock out 15% which is a lot (PM and lawn care).

It’s not an exact science either. Over the last few years my repairs have made up about 3%, which I wouldn’t have known without living there. But my vacancy has been 0. Maybe instead what you could do is focus on building a big enough reserve while you are living there then lower those numbers a little bit when you move out. Like if 30k sitting in an account keeps you comfortable, get there as quick as you can then do smaller amounts? Just an idea. 

[Marcus Auerbach]

Yes, you are too conservative. 

Even for a regular investment property. It is easy to prove every deal to be not good enough by just going a little higher in every category. 

For a house-hack you are definitely too conservative. Remember: the worst house hack in town still beats every single family financially.

I have been an investor for 15 years and my team works with a lot of house hackers in Milwaukee buying duplxes. Here is what I know: almost every client who bought a cheaper duplex for their first house hack will buy 100k higher for their second one. 

The biggest mistake I see is to worry too much about the cost of things like lawn mowing and water bill and the exact percentage for vacancies, but not being enough aware of the general condition of the property - resulting in 20k, 50k or more in capex a few years down the road.

My advice: look for a quality property that has all the big-ticket items already done. Newer windows, roof, kitchens, bathrooms, HVAC etc. And you want to be in a good location. Both condition and location will allow you to attract better tenants and better long-term financial performance. And since you live there, better quality of life. 

That is way more important than cash flow math. Your future self will thank you.

[Brian Sardinskas]

Hey @Benjamin Sulka,

I think these numbers depends on a couple factors, such as your market, property type, and overall goals.

10% for future property management: If your goals are to get your properties under management as quick as possible, then it would be worth it to keep this the same. In my opinion, if you are going to be living in the same area as your rentals, I would not even factor property management in right now. Down the line if you start to have too many properties to self manage, increased rents/lower interest rates may allow you more room to do so. Also, there are a lot of great softwares out there that basically take care of what property managers do, so you could look into that instead.

10% vacancy: In my market, 5% vacancy is plenty, this is something that you will need to figure out for your particular market. A google search or talking with investors in your area would be best.

10% cap ex: I think 5-10% here is okay. It depends also the condition and age of the property. The older and broken down the building is, the more you want to put away.

5% for repairs: Again, this will depend on the property condition, but I also reserve 5% for repairs because I have an old house.

5% for lawn: If you plan to live in the area, I would just buy a used lawn mower for $100 and do it yourself. BUT, this is personal preference, if you are trying to make this a passive investment and don’t want to be cutting the lawn, then 5% is probably fine.

Hopefully this helps! Good luck!

[Anthony Swain]

Hey @Benjamin Sulka

Good luck on your house hacking endeavors. I saw some of your previous posts, so I'm glad you're getting closer to your first.

I think your rent sounds pretty cheap between you and your fiance now, but I also don't know the COL in your area.

Maybe if you found something comparable in price or slightly less, then it could still math out, because you'll be benefiting from appreciation, loan amortization, and potentially a housing expense decrease over the long term even if slightly. 

Your numbers seem pretty conservative to me, especially your vacancy. That is close to 1 month vacancy every year. I feel like if you're paying a PM another 10%, I'd hope they weren't allowing almost a month vacant every year. With that being said, have you considered self-management as a house hacker. Even if you just do it in the short term, then maybe you'd save 10% there and be efficient enough to cut your vacancy % down to 5? (Food for thought)

10% for Cap Ex & 5% for maintenance sounds fair and consistent with many BP suggestions.

If it is value add and you do renovations, then hopefully your place will be "like new" and won't have many of those repairs/maintenance/cap ex issues early on. 

Ben, I hope some of these thoughts help your decision making process. If you have any questions, I'd be happy to share my experience or be a fly on the wall to bounce some ideas off of. 

You got this though! You sound like you're very educated and are ready to take action!

-Ant, fellow house hacker haha

[Anthony Swain]

@Brian Sardinskas GREAT POINTS again man!

I think self-management is more than doable with all the awesome property management software out there. For example, BP members already get access to RentRedi and Stessa. I personally use Avail for PM & Stessa for accounting/book keeping. Super user friendly for both. I spend probably hour managing my house hack per month. 

As far as lawn maintenance, you could be looking down the barrel of $200+ a month for basic lawn care. If you would rather pay that monthly to take a task off your plate, then go for it. If you have an hour every couple weeks to cut the grass, then just buy a mower like Brian mentioned. Maybe you can even take turns with your fiance haha (jk). 

I hope this extra bit of info helps! 

[V.G Jason]

I'm going to tell you if you're too conservative, that's a great problem to have. I don't earmark %s, I keep that cash set aside from the get. Granted, I am coming from different means but that X% for a roof in 7-10 years doesn't wait for you-- it could come sooner.

So be conservative with this, and if you're wrong-- great. Don't stress that aspect.

I'd say what you really want to do is keep probably 75-100% of capex repairs set aside, 3-6 months of tenant turnover and 3-6 months of vacancies set aside. Everyone will say I'm too conservative, but most of these people on here can't weather a single month of vacancy and/or a true capex problem. I'd rather be safe than sorry.

[Benjamin Sulka]

Quote from @Daniel McDonald:

That does seem pretty steep and tough to do these days. I think a lot of people are going 2-5% these days. But it really is whatever makes you sleep at night. 

Could you self manage? That would knock out 15% which is a lot (PM and lawn care).

It’s not an exact science either. Over the last few years my repairs have made up about 3%, which I wouldn’t have known without living there. But my vacancy has been 0. Maybe instead what you could do is focus on building a big enough reserve while you are living there then lower those numbers a little bit when you move out. Like if 30k sitting in an account keeps you comfortable, get there as quick as you can then do smaller amounts? Just an idea. 

 Daniel,

Thanks for the insightful response!

I would be self managing for several years but threw that into my numbers so that the investment still makes sense when I do offload to property management down the line. 

I like the idea of building up a big reserve and house hacking will definitely help do this quicker.

[Benjamin Sulka]

Quote from @Marcus Auerbach:

Yes, you are too conservative. 

Even for a regular investment property. It is easy to prove every deal to be not good enough by just going a little higher in every category. 

For a house-hack you are definitely too conservative. Remember: the worst house hack in town still beats every single family financially.

I have been an investor for 15 years and my team works with a lot of house hackers in Milwaukee buying duplxes. Here is what I know: almost every client who bought a cheaper duplex for their first house hack will buy 100k higher for their second one. 

The biggest mistake I see is to worry too much about the cost of things like lawn mowing and water bill and the exact percentage for vacancies, but not being enough aware of the general condition of the property - resulting in 20k, 50k or more in capex a few years down the road.

My advice: look for a quality property that has all the big-ticket items already done. Newer windows, roof, kitchens, bathrooms, HVAC etc. And you want to be in a good location. Both condition and location will allow you to attract better tenants and better long-term financial performance. And since you live there, better quality of life. 

That is way more important than cash flow math. Your future self will thank you.

 Marcus,

This is fantastic advice and I really appreciate you responding! 

Like you alluded to, my goal is to avoid those huge capex expenses right out of the gate. Going to reassess my reserve % for some of the other items like vacancy, property management, and general upkeep. 

[Benjamin Sulka]

Quote from @Brian Sardinskas:

Hey @Benjamin Sulka,

I think these numbers depends on a couple factors, such as your market, property type, and overall goals.

10% for future property management: If your goals are to get your properties under management as quick as possible, then it would be worth it to keep this the same. In my opinion, if you are going to be living in the same area as your rentals, I would not even factor property management in right now. Down the line if you start to have too many properties to self manage, increased rents/lower interest rates may allow you more room to do so. Also, there are a lot of great softwares out there that basically take care of what property managers do, so you could look into that instead.

10% vacancy: In my market, 5% vacancy is plenty, this is something that you will need to figure out for your particular market. A google search or talking with investors in your area would be best.

10% cap ex: I think 5-10% here is okay. It depends also the condition and age of the property. The older and broken down the building is, the more you want to put away.

5% for repairs: Again, this will depend on the property condition, but I also reserve 5% for repairs because I have an old house.

5% for lawn: If you plan to live in the area, I would just buy a used lawn mower for $100 and do it yourself. BUT, this is personal preference, if you are trying to make this a passive investment and don’t want to be cutting the lawn, then 5% is probably fine.

Hopefully this helps! Good luck!

 Brian, 

Fantastic points that you brought up here.

The properties in my area are definitely older (1920s and 30s) so I'm going to stick with the 10% for capex but I'm going to reassess PM and vacancy like you said. The plan is to self manage at least for the first 5-10 years so it makes sense not to include this. Not looking to offload it to PM right after I buy or anything like that.

Also, I'm totally cool with and expected to mow the grass myself. Will reduce this reserve number given that.

Thanks for helping!

[Carlos Ptriawan]

Quote from @Benjamin Sulka:

Hey house hacking community, 

I've been active on these forums for a while and finally getting ready to purchase my first house hack within the next 3 months. 

My goal is to save on my living expenses and pay less than I am renting right now (my fiance and I pay $1,450 and split it). 

Since I'm relatively versed in general real estate investing knowledge, I'm aware of all of the line items to account for when analyzing a property. Being conservative with my reserves is causing a lot of deals to look bad on paper (after moving out of the property). I'm not expecting a property to cash flow with 3.5-5% down and 6.5-7% interest, but I'd like to see it at least get close to breaking after moving out. 

Here is what I'm taking for reserves (outside of location specific expenses like home insurance, utilties, taxes etc.)

- 10% for future property management 

-10% for vacancy

-10% for CapEx

-5% for repairs and maintenance

-5% for lawn and grounds keeping

-0.5% of purchase price for PMI based on my credit score

For a house hack, is this too conservative? Am I passing up on potentially lucrative house hack deals because I'm taking too much out? Despite the book being written in 2019, Craig Curelop's house hacking book describes the seemingly low reserves that he takes of $300-600 per month.

Would love a sanity check from some fellow house hackers! 

Thanks so much for your time. 

-Ben, aspiring multifamily house hacker

 no my reserve is half price of total loan.

[Daniel McDonald]

Quote from @Benjamin Sulka:

Quote from @Daniel McDonald:

That does seem pretty steep and tough to do these days. I think a lot of people are going 2-5% these days. But it really is whatever makes you sleep at night. 

Could you self manage? That would knock out 15% which is a lot (PM and lawn care).

It’s not an exact science either. Over the last few years my repairs have made up about 3%, which I wouldn’t have known without living there. But my vacancy has been 0. Maybe instead what you could do is focus on building a big enough reserve while you are living there then lower those numbers a little bit when you move out. Like if 30k sitting in an account keeps you comfortable, get there as quick as you can then do smaller amounts? Just an idea. 

 Daniel,

Thanks for the insightful response!

I would be self managing for several years but threw that into my numbers so that the investment still makes sense when I do offload to property management down the line. 

I like the idea of building up a big reserve and house hacking will definitely help do this quicker.

 If you are planning on sef managing for a few years then you will likely be helped by increasing rents too! So when it comes time to give up that 10% your rents could be a good chunk higher. My plan is to self-manage my house hacks as long as humanly possibly. You will be shocked when you see how little management it requires. Of course if the goal is to build a big portfolio that's a different story, but definitely manage the first few yourself for as long as you can. 

[Rick Albert]

You know your market better than anyone else.

Regarding vacancy, check out comps on Zillow and when yo scroll down after the description, they give you a snapshot as to the activity. That will give you a sense of vacancy.

Every property is different so 10% for CapEx might be high or you can redo some of the major systems upfront in order to lower that percentage.

How much is a gardener there? Here in Los Angeles I pay $110/month. You could also look into doing drought tolerant/low maintenance landscaping to help with these bills. 

[Benjamin Sulka]

Quote from @Anthony Swain:

Hey @Benjamin Sulka

Good luck on your house hacking endeavors. I saw some of your previous posts, so I'm glad you're getting closer to your first.

I think your rent sounds pretty cheap between you and your fiance now, but I also don't know the COL in your area.

Maybe if you found something comparable in price or slightly less, then it could still math out, because you'll be benefiting from appreciation, loan amortization, and potentially a housing expense decrease over the long term even if slightly. 

Your numbers seem pretty conservative to me, especially your vacancy. That is close to 1 month vacancy every year. I feel like if you're paying a PM another 10%, I'd hope they weren't allowing almost a month vacant every year. With that being said, have you considered self-management as a house hacker. Even if you just do it in the short term, then maybe you'd save 10% there and be efficient enough to cut your vacancy % down to 5? (Food for thought)

10% for Cap Ex & 5% for maintenance sounds fair and consistent with many BP suggestions.

If it is value add and you do renovations, then hopefully your place will be "like new" and won't have many of those repairs/maintenance/cap ex issues early on. 

Ben, I hope some of these thoughts help your decision making process. If you have any questions, I'd be happy to share my experience or be a fly on the wall to bounce some ideas off of. 

You got this though! You sound like you're very educated and are ready to take action!

-Ant, fellow house hacker haha

Ant,

Thanks so much for the comment, my friend. Very helpful. 

Absolutely will be self managing but was still accounting for the PM % so that the numbers still shake out when the day comes to offload to a property manager. 

 
Going to reconsider the  vacancy piece as well. 

We should definitely connect! Shoot me a DM and we can set up some time to chat! 

[Benjamin Sulka]

Quote from @Anthony Swain:

@Brian Sardinskas GREAT POINTS again man!

I think self-management is more than doable with all the awesome property management software out there. For example, BP members already get access to RentRedi and Stessa. I personally use Avail for PM & Stessa for accounting/book keeping. Super user friendly for both. I spend probably hour managing my house hack per month. 

As far as lawn maintenance, you could be looking down the barrel of $200+ a month for basic lawn care. If you would rather pay that monthly to take a task off your plate, then go for it. If you have an hour every couple weeks to cut the grass, then just buy a mower like Brian mentioned. Maybe you can even take turns with your fiance haha (jk). 

I hope this extra bit of info helps! 

 Love this! Going to look further into those two softwares! 

[Benjamin Sulka]

Quote from @V.G Jason:

I'm going to tell you if you're too conservative, that's a great problem to have. I don't earmark %s, I keep that cash set aside from the get. Granted, I am coming from different means but that X% for a roof in 7-10 years doesn't wait for you-- it could come sooner.

So be conservative with this, and if you're wrong-- great. Don't stress that aspect.

I'd say what you really want to do is keep probably 75-100% of capex repairs set aside, 3-6 months of tenant turnover and 3-6 months of vacancies set aside. Everyone will say I'm too conservative, but most of these people on here can't weather a single month of vacancy and/or a true capex problem. I'd rather be safe than sorry.

 V.G,

This was my initial reason for being too conservative. Would rather be safe than sorry. 

However, it is disqualifying a bunch of properties that may be feasible otherwise. 

Thanks for your response! 

[Benjamin Sulka]

Quote from @Rick Albert:

You know your market better than anyone else.

Regarding vacancy, check out comps on Zillow and when yo scroll down after the description, they give you a snapshot as to the activity. That will give you a sense of vacancy.

Every property is different so 10% for CapEx might be high or you can redo some of the major systems upfront in order to lower that percentage.

How much is a gardener there? Here in Los Angeles I pay $110/month. You could also look into doing drought tolerant/low maintenance landscaping to help with these bills. 

 Thanks for the tips for looking into vacancy! Really helpful.

Regarding capex, most of the properties that I'm looking at were built between 1920 and 1950. 

I'm not sure how much a gardener is here, but I would definitely be doing the lawn care myself for the first few years.

[V.G Jason]

Quote from @Benjamin Sulka:

Quote from @V.G Jason:

I'm going to tell you if you're too conservative, that's a great problem to have. I don't earmark %s, I keep that cash set aside from the get. Granted, I am coming from different means but that X% for a roof in 7-10 years doesn't wait for you-- it could come sooner.

So be conservative with this, and if you're wrong-- great. Don't stress that aspect.

I'd say what you really want to do is keep probably 75-100% of capex repairs set aside, 3-6 months of tenant turnover and 3-6 months of vacancies set aside. Everyone will say I'm too conservative, but most of these people on here can't weather a single month of vacancy and/or a true capex problem. I'd rather be safe than sorry.

 V.G,

This was my initial reason for being too conservative. Would rather be safe than sorry. 

However, it is disqualifying a bunch of properties that may be feasible otherwise. 

Thanks for your response! 

 That's why you rather be safe than sorry. Remember now....

Fast solutions have slow problems!

[Rick Albert]

Quote from @Benjamin Sulka:

Quote from @Rick Albert:

You know your market better than anyone else.

Regarding vacancy, check out comps on Zillow and when yo scroll down after the description, they give you a snapshot as to the activity. That will give you a sense of vacancy.

Every property is different so 10% for CapEx might be high or you can redo some of the major systems upfront in order to lower that percentage.

How much is a gardener there? Here in Los Angeles I pay $110/month. You could also look into doing drought tolerant/low maintenance landscaping to help with these bills. 

 Thanks for the tips for looking into vacancy! Really helpful.

Regarding capex, most of the properties that I'm looking at were built between 1920 and 1950. 

I'm not sure how much a gardener is here, but I would definitely be doing the lawn care myself for the first few years.

 The age of the properties is a misconception and doesn't always have a bearing on the condition of a home. A place can be completely gutted and remodeled, but because it wasn't torn down it still shows the original build date. For example, a house built in 1920 with new HVAC, new roof, and a new electrical panel might be a better buy than a house built in 1950 with original systems.

For the gardener services, why have a line item for it if you are handling it? Also, is it a good use of your time? Are there higher income producing activities that would be a better use and could make you more than what could be $25 a week to cut grass? For example if it takes you 30 minutes to cut the grass, how many deals could you have analyzed during that time to expand your portfolio? Your time is valuable. Only do it if it brings you joy, otherwise delegate. 

[Alecia Loveless]

@Benjamin Sulka I house hack a duplex and dont have anywhere near that amount of reserves. When we bought it I renovated the tenant side of the building and just factored in those costs right out of the gate and then wrote them off. I’ve secured a great long term tenant who lived with me in a different location prior to me purchasing this building about 4 years ago. I’ve had 0% vacancy, and don’t allocate for this because I know he’s going to stay for a long time to come. I’d think 4-5% would be sufficient for vacancy.

We mow our own lawn and the parking lot is usually plowed by the association that owns it. I have two deeded parking spots in the lot but owe 0% to the condo association that owns it through a stroke of luck. If we get a big snow storm my contractor comes and cleans up our two spaces as a curtesy.

If I were you I would lean towards properties with smaller landscaping issues if possible to minimize costs. I take the size of the yard into consideration with all my purchases.

Depending on the age and condition of the building you'll need more maintenance and CapEx. I still don't allow for more than 6% on CapEx with any of my purchases. I only rarely have maintenance issues and 5-6% seems enough for this.

That being said my average account has about $9,000 in it right now. I’ve got 7 properties and each month I generally add more money to each one.

My biggest expense possible barring some unforeseen disaster would be a new furnace for about $10,000. I’m working to eliminate those in most of my buildings through the Installation of propane heating systems.

I would think 25% would be more than sufficient in funds to keep you in business.

[Anthony Swain]

@Alecia Loveless

Thanks for sharing your experience. I agree, if you're doing a lot of renovations in the beginning, then you would hope many of those cap ex/maintenance issues wouldn't come up right away. However, I think its prudent to have some reserves being set aside on a regular basis. 

Also, if you do a great job placing tenants, then your maybe your real vacancy will be closer to 0. Good to factor in a percentage for vacancy, but the real number might be lower.  

It sounds like you have a solid foundation and will be prepared for any situations that arise. 

Good luck with your properties and future investing :)

[Benjamin Sulka]

Quote from @Rick Albert:

Quote from @Benjamin Sulka:

Quote from @Rick Albert:

You know your market better than anyone else.

Regarding vacancy, check out comps on Zillow and when yo scroll down after the description, they give you a snapshot as to the activity. That will give you a sense of vacancy.

Every property is different so 10% for CapEx might be high or you can redo some of the major systems upfront in order to lower that percentage.

How much is a gardener there? Here in Los Angeles I pay $110/month. You could also look into doing drought tolerant/low maintenance landscaping to help with these bills. 

 Thanks for the tips for looking into vacancy! Really helpful.

Regarding capex, most of the properties that I'm looking at were built between 1920 and 1950. 

I'm not sure how much a gardener is here, but I would definitely be doing the lawn care myself for the first few years.

 The age of the properties is a misconception and doesn't always have a bearing on the condition of a home. A place can be completely gutted and remodeled, but because it wasn't torn down it still shows the original build date. For example, a house built in 1920 with new HVAC, new roof, and a new electrical panel might be a better buy than a house built in 1950 with original systems.

For the gardener services, why have a line item for it if you are handling it? Also, is it a good use of your time? Are there higher income producing activities that would be a better use and could make you more than what could be $25 a week to cut grass? For example if it takes you 30 minutes to cut the grass, how many deals could you have analyzed during that time to expand your portfolio? Your time is valuable. Only do it if it brings you joy, otherwise delegate. 

 Rick,

Great points. This first property is going to be a house hack so I figured I would learn some adult activities and cut the grass myself. Could listen to the BP podcast while doing it. 

Definitely think my time is more valuable than cutting grass though so it may make sense to delegate. 

[Benjamin Sulka]

Quote from @Alecia Loveless:

@Benjamin Sulka I house hack a duplex and dont have anywhere near that amount of reserves. When we bought it I renovated the tenant side of the building and just factored in those costs right out of the gate and then wrote them off. I’ve secured a great long term tenant who lived with me in a different location prior to me purchasing this building about 4 years ago. I’ve had 0% vacancy, and don’t allocate for this because I know he’s going to stay for a long time to come. I’d think 4-5% would be sufficient for vacancy.

We mow our own lawn and the parking lot is usually plowed by the association that owns it. I have two deeded parking spots in the lot but owe 0% to the condo association that owns it through a stroke of luck. If we get a big snow storm my contractor comes and cleans up our two spaces as a curtesy.

If I were you I would lean towards properties with smaller landscaping issues if possible to minimize costs. I take the size of the yard into consideration with all my purchases.

Depending on the age and condition of the building you'll need more maintenance and CapEx. I still don't allow for more than 6% on CapEx with any of my purchases. I only rarely have maintenance issues and 5-6% seems enough for this.

That being said my average account has about $9,000 in it right now. I’ve got 7 properties and each month I generally add more money to each one.

My biggest expense possible barring some unforeseen disaster would be a new furnace for about $10,000. I’m working to eliminate those in most of my buildings through the Installation of propane heating systems.

I would think 25% would be more than sufficient in funds to keep you in business.

 Alecia,

This is really helpful and I'm grateful for your contributions to the BiggerPockets forums. 

Do you take age of the property into account when taking your reserves?