Saving for the unknown


#1

Just curious what others do as far as saving for the park’s expenses. Is there a rule of thumb like put away 10% of the profit each month into a savings account for the unexpected problems or anticipated long term maintenance issues? Every month there seems to be a new “one time” expense and I know eventually the sewer pipes will be needing a replacement. Thanks in advance for any advice.


#2

I prefer to maintain a LOC that I draw from as needed and then pay down with future rental income.


#3

too many factors to really have a rule of thumb…also reserves can depend upon your bank as well. they may require it to be put % of something away each month for a rainy day.


#4

Over the long term, you should save for replacement of every facility you are responsible for at the rate of [how fast does it decay / cost to repair].

You buy into that cycle somewhere along its depreciation life and eventually you or someone down the line will have to repair the roads, redo the parking spaces, replace the sewer pipes, etc.

I figure 30 years on average is a good rule of thumb – you’ll have to “rebuild” it from scratch over a 30 year mortgage. I figure approx cost to rebuild is $20k plus roads, although that’s a complete ballpark. Roads are a huge expense. In the alternative, purchase price again over 30 years maybe stretch to 50 years. 2% of your purchase price is 25% of your NOI if you bought at an 8% cap rate. Food for thought. Of course you can discount that over 30 years too so maybe less.

The big hits can come suddenly unless you plan way ahead. (Sewer failure is a quick way to get shut down).


#5

Thanks for the advice Greg, Brandon, and Groenerm. All good points. I have been turning around this park for the last three years and have been looking at these expenses as one time deals that I won’t have to worry about for a while. But now that those are coming to an end I want to have a plan for the future. I like the LOC for the short term and smaller expenses and could potentially use that until there is a big savings account established. I had the water system redone and at the same time got quotes for the sewer replacement which will run about $100k for a full replacement. Luckily I have time to save for that and all the other systems are good to go. Thanks for the food for thought!