Working Capital Ratio

Hey all, newbie buying a park. This is my first adventure into multifamily. In the past I have dealt with single family and only a couple at a time. So, honestly as issues came up I just dealt with them and didn’t think about it much. However, this animal is significantly different it seems. The operational repair bill could be quite a bit larger than cleaning up a POH after a tenant leaves.

I know all parks come in different sizes and conditions. I have limited capital to get started, 300K with a passive partner or 150K by myself. So, that leaves me in the 400 to 800K category with 800 needing seller financing and a smaller down.
In this category of parks I have observed:

  1. Rural, with older infrastructure, often clay, or concrete sewer lines to leach fields, galvanized water pipe, park roads in disrepair often needing additional drainage to remove the standing water and on a well system.
  2. Suburban parks connected to the city utilities, but usually galvanized water pipes, and roads that often have drainage issues.
  3. Most seem to have some deferred maintenance on the electrical peds and many are not sub-metered for water.
    Of course, I haven’t addressed the POH and vacant lot capital needs yet.

With all the above said, I think I am a bit confused on how to plan my budget for starting working capital needs.

Do you have a standard ratio for WC that you try to maintain? I was thinking 60 days, but am not sure, maybe if the infrastructure is real old I should have 90 or 120? Or, maybe it just needs to be a minimum fixed number to get started, because stuff costs a lot when it breaks and is affecting the whole park. The number of days ratio might be irrelevant on a smaller older park.

Your wisdom would be appreciated.

I have a small community, 30 + homes, with private well and septic. I maintain 100K accessible in reserve. I draw on and replenish on a ongoing bases as my operating account. In my case it is a available line of credit but would best be actual reserve funds in cash.
When my septic reaches the end of it’s life span it will require the majority of that account to replace.

Greg, what % of gross lot rent does the 100k represent

At this time my gross lot rent is/averages just above 100K annually. This is considerably more than when I purchased the community although I held 100K in reserve from the beginning.
How much you hold may depend entirely on your risk tolerance. You can operate with far less if you have the tolerance and assume in a major emergency ( septic failure/replacement) you can find the financing to cover the costs. In my situation having 100K in reserve is not a large amount of money. Others starting out investing may see this differently.
If I were to hold multiple communities I would likely still have the same amount in reserve assuming not all would fail at once and the higher income would replenish the funds faster.

Makes sense, thanks for the input. Listening to Dave and Frank their working capital in the early days was their balance on their credit card limit :slight_smile: