BiggerPockets

Just wanting to point out the importance of analyzing repair costs before buying for a buy and hold. Assuming 50% expenses and spending the rest on PITI can get you in trouble.

In the last 5 yrs my duplex has averaged over 76% in expenses per yr including capital improvements. Nothing unusual, just the regular stuff.

Say you bought a building with a roof that was passable. That winter a windstorm took part of it off. Mine was 30 yrs old so time for a redo. With some dryrot and a large building, $12,000.

So maybe the paint isn't great but nothing immediate. Couple yrs and it is peeling. My building has lead paint and with fines for not using lead certified painters upwards of 30k the paint job tops 6k.

A little dryrot in my bathroom turns into a major job and with a licensed and bonded contractor, 4k+.

Add a few odds and ends and it adds up.

While the 50% rule holds up, don't use that instead of some good estimating and planning upfront.

I have owned this building for 20 yrs. For that time the expenses have averaged 50.1%. With all the repairs I've done I expect the overall to drop below 50% eventually.

I started keeping track of the "% rule" for my properties. My average to date is 71%. That is based off of the net income compared to market rent starting with the first date the unit was available for rent, so it should come down with time. For the last 9 months it is 44%.

This building was a cash cow for a long time. When I got a load of what exterior paint jobs with lead paint cost, I thought all bets were off.

This building is self managed and I pay water, sewer and garbage. Rents are low with almost no turnover, one tenant is original, 20 yrs.

The TI is already accounted for. You only need to account for PI if you estimate using 50% for the long run.

There certainly are properties that have 76% though! There are also some with less than 50% if managed properly. 50% is a RULE OF THUMB.

Compounding. 7.35% annual.

Another number for this propery is maintenance, repairs and capex at 18.6% for the 20 yrs. This compares with the widely viewed apartment data income and expense of 10%.

Looks to me like while they are high on management fees they have avoided the big ticket items by having newer properties. Once they get older I'd bet expenses will exceed 50%.

Nathan, he might have a "cash value" insurance policy rather than a "replacement cost" insurance policy. They pay you a depreciated amount based on how much useful life it had left. In his case, that probably wasn't much.

Why would you want a cash value policy?" Because it's cheaper and you're willing to bear more risk. I have one like that.

on average, with 6 SFH that I own, the first 10 months were actually around 100%! They were vacant REOs so it took a bit of time to get all of them rented, and I had one very bad tenant. Right now I have 5 rented, to some very good tenants, 4 of which have been in for more than a year, and the expenses have been slowly but steadily going down. For 2011, it was 80%, but for the past 6 months it has been around 60-65%, and that is where I expect it to remain until I get all 6 rented, in which case, judging from current expenses, I will arrive at around 55%. It will take a while for the whole thing, from inception, to converge below 60%, but the rents satisfy the "3% rule" so I really don't mind :)

As for compounding interest, Einstein didn't call it the 8th wonder of the world for nothing :)

Chris, being a rehabber you are very qualified to know what is going to happen coming up. With a rehabbed property expenses should be very low for a long time, assuming you don't get a really bad tenant.

Kyle, what you are doing is really cool. It is like the reserve study used by condominium complexes. The numbers here are your calling.

When I started I took every cent I had and bought fixer properties and only had the rent to fix them up with. It is amazing how creative one becomes when they don't have any money. I never did all those things everyone recommends but when I was able to get a creditline life got a lot better.

Sharon, the 3% rule is something to die for. It sounds like you are handling the situation. I like that 100% expenses. That is pretty funny. Interested to hear more about how you do in the future. If you have 55% fully rented and are getting 3% you must have heavy repairs or something unusual happening.

Kyle, was the treasurer in 2002 and in 2006 for our 340 unit condo here in Portland. The reserve study is an amazing thing but very easily manipulated.

It sounds like you are all set up to go big. Very impressive. It takes a real numbers person to enjoy doing a reserve study.

There are careers made around here by people doing those. One local CPA has made a name for himself by using a minimum balance model that requires less reserves than the typical 100% funding model. It is called a cash flow analysis and is based on maintaining the least possible balance at all times. Needless to say people love it and he is doing amazingly well for himself.