Reserve line on a five room co-living house, per room, per square foot, or a slice of gross

Question

Re-underwriting room rented houses tends to expose the reserve line as the softest number in the whole model. Rent, taxes, and insurance can be defended within a few hundred dollars. Reserves are often just a convention rather than a calculation. Take a concrete example: 1,900 square feet, five rooms, gross 3,700 a month at full occupancy. At 8% of gross that holds $296 a month. At $65 per occupied room per month that holds $325. At $1.25 per square foot per year on the structure that holds $198. That spread is over $1,500 a year, a real chunk of levered return on a house this size. The case for per room: wear is people driven. Five adults with five schedules put five times the load on one kitchen and two showers, and turn frequency scales with headcount rather than building size. Room turns, paint, door hardware, furniture replacement all track bodies. The case for per square foot: the expensive items don't care how many people live there. Roof, siding, HVAC systems, water heater, sewer lateral all cost the same whether one family or five strangers occupy the house, and a percent of gross convention can badly underfund that in a high rent market and overfund it in a cheap one. A blended number applied uniformly across a portfolio is likely wrong in both directions on different houses, which argues for matching the reserve method to what's actually driving wear on each property rather than picking one convention for everything.

renee_dubois · Accepted Answer

Two lines, and hollow's roof is the reason. The building line is set by square foot and age, never by rent. On a 1,900 foot house with average bones, $1.30 to $1.60 a foot a year depending on what has already been replaced, so somewhere around $210 to $255 a month for your middle house. If the roof and both HVAC units are under eight years old, sit at the bottom of that range. If they are original, sit above it, and write down the year each major component was installed so the number has something behind it. The wear line is the one that is genuinely different from whole-unit leasing, and it should be funded per occupied room. The consistent pattern in room-rented houses is that the shared spaces consume the money and the bedrooms barely move. Kitchen surfaces, bathroom fixtures, interior doors, hallway paint, the washer. A per-room number of $45 to $55 a month on top of the building line is defensible, and it runs higher in the first eighteen months of a new house because the previous owner's finishes were never chosen for this use. So you would be holding roughly $240 building plus $250 wear at five rooms. That is above all three of your conventions, and all three of them are light. The assumption it hangs on is turn frequency. At a room turn every fourteen months the wear line covers it. At every seven months, which is what a student-heavy house does, the wear line is a fantasy and you should be budgeting turns as an operating expense with a real dollar cost per turn rather than pretending they are capital. Pull your own move-out dates for the last three years before you set the number. That history is the only input in the whole model you actually own.

laurenkim53 · Answer

Percent of gross is the convention that breaks worst at the low end of the market. Take rooms renting for 380 to 450 in a small town. Eight percent of a $2,100 gross is $168 a month, and a roof on a house that size runs about $9,400. That is four and a half years of the entire reserve consumed by one line item, before anything else in the house asks for money. The roof costs what it costs whether the rooms rent for 400 or 800. Tying the reserve to rent means the cheapest houses, which are usually the oldest ones, get the smallest reserve. That is backwards. The sounder practice is a flat building number by square foot, plus a separate turn budget funded out of each move-out. The turn budget is closer to a habit than a true reserve, and it keeps routine turnover from draining the capital line.

Reserve line on a five room co-living house, per room, per square foot, or a slice of gross

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