Take any marginal listing, delete vacancy, maintenance, and capital expenditures from the model, and it cash flows. This is the oldest trick in real estate marketing, and plenty of investors play it on themselves without any seller's help.
Reserves are not pessimism. They are the recognition that a rental's costs arrive in lumps while its income arrives monthly, and that an underwrite which ignores the lumps is measuring a property that does not exist. Here is how to size the three reserves that matter, and how to adjust them for the property in front of you instead of copying a generic percentage.
Vacancy: the certainty of empty months
Every tenancy ends. When it does, you get days or weeks of zero income, plus make-ready costs, plus leasing time. Vacancy reserve spreads that certainty across the months you do collect.
Baseline: 5 to 10 percent of gross rent. One month vacant per year is 8.3 percent, which is why 8 percent is such a common default. Adjust from there:
| Situation | Lean toward |
|---|---|
| Strong rental demand, below-market rent | 5% |
| Typical market, market-rate rent | 8% |
| Soft market, high-turnover tenant profile | 10%+ |
| Student or short-lease rentals | 10%+, plus higher turnover costs |
Two mistakes dominate. The first is zero, usually justified as "this area always rents." Areas do not sign leases; tenants do, and tenants leave. The second is treating the percentage as the whole story. Turnover also costs money directly: paint, cleaning, small repairs, marketing, sometimes a leasing fee. A stable five-year tenant and a unit that turns every twelve months can have the same occupancy rate on paper and wildly different economics.
Multifamily gets a small structural advantage here: one vacant unit in a duplex is a 50 percent income hit, not 100 percent, which is part of the duplex-versus-single-family calculus.
Maintenance: the cost of ordinary life
Maintenance is the routine stuff: the leaking faucet, the dead outlet, the garbage disposal, the service call. Individually small, collectively relentless.
Baseline: 5 to 10 percent of gross rent, with the property's age and condition doing the steering:
- Newer or fully renovated (roughly post-2000 systems): 5 percent is defensible.
- Mid-century with updates: 8 percent.
- Pre-1950, deferred maintenance, or "as-is": 10 percent, and treat that as a floor.
One structural point that percentage rules hide: repairs cost fixed dollars, not percentages. A $150 service call is the same on an $800 unit and a $2,400 unit, so cheap units carry structurally higher maintenance ratios. If you are screening low-priced properties because the rent-to-price math looks spectacular, this is one of the ways the 1% rule flatters them.
CapEx: the roof does not care about your spreadsheet
Capital expenditures are the big-ticket components that fail rarely and expensively: roof, HVAC, water heater, flooring, appliances, exterior paint, driveway. None of them shows up in a typical month, and all of them show up eventually. That is exactly why they are the most-skipped line in amateur underwriting: twelve clean months feel like proof the reserve was unnecessary, right up until year three delivers a $9,000 roof.
Baseline: about 5 percent of gross rent, but CapEx rewards doing it properly, because the honest number comes from component lifespans, not a percentage. The five-minute version: list the major components, estimate replacement cost and remaining life, and divide.
| Component | Replacement cost | Lifespan | Monthly accrual |
|---|---|---|---|
| Roof | $9,000 | 25 yrs | $30 |
| HVAC | $6,000 | 18 yrs | $28 |
| Water heater | $1,400 | 10 yrs | $12 |
| Appliances | $2,500 | 12 yrs | $17 |
| Flooring | $4,000 | 10 yrs | $33 |
| Exterior paint / siding | $5,000 | 12 yrs | $35 |
| Total | about $155/mo |
On a $1,500 rent that is roughly 10 percent, double the generic 5 percent default. That gap is typical for older buildings, and it is why "turnkey" deserves skepticism: new paint does not reset the age of the furnace. The inspection report is your parts list; use it to build this table for the actual property rather than trusting anyone's average, and ask for the age of every major component in writing.
Putting it together
Stack the three reserves and you get 18 to 25 percent of gross rent that never touches your pocket in a normal month but is absolutely spent over the hold. On the worked $1,900-per-month duplex, reserves alone are roughly $300 to $475 per month. Add taxes, insurance, and management and you can see where the 50% rule comes from; the reserves are nearly half of it by themselves.
A deal that only cash flows without reserves does not cash flow. The reserves are not a scenario; they are the schedule on which the property's real costs arrive. Deleting them from the model does not delete them from the building.
Two operating notes. First, actually fund the reserves: move the money to a separate account monthly, so the February furnace is an inconvenience instead of a credit card balance. A common target is a floor of three to six months of expenses per property, built up from these accruals. Second, do not refund yourself in good years. A quiet year means the roof is one year closer, not that the model was wrong.
Reserves are where fake deals go to die
Most listings that look like they cash flow stop cash flowing the moment honest reserves enter the model, and that is the point: the reserves are doing the filtering that the market's optimism will not. Every deal PadSweep underwrites carries vacancy, maintenance, and CapEx reserves in the math before a single property is ranked, next to real taxes, insurance, and live mortgage rates. The deals that survive are the ones that pay you after the roof fund is full. You can browse live market numbers or run the full underwrite on your own market with a free trial.