BiggerPockets

I don't want to debate if the 50% rule in this thread. I want to talk about the assumptions and categories to see how a landlord can be a lowest cost producer/efficient entrepreneurs.

I know it varies from state to state. But my general assumptions are (feel free to correct me if I am wrong).

6-10% Property Management
From what I have read others have said property management accounts for 10% of the 50% rule. So if a property owner does that himself effectively they should save about 10%.

5-20% Property Taxes
This is a huge difference state to state and depending what you focus on. I think Texas these costs are massive.

5-15% Vacancy
This is another thing that will vary a lot depending on area, pricing, skill of manager, quality of unit, etc.

2-5% Insurance
This cost cannot be altered very easily. Lower end units I would assume have a higher cost by %.

0-20% Utilities
Some landlords pay for water/trash. All the utilities, etc.

0-5% Landscaping
Some landlords provide landscaping others don't.

5-20% Maintenance/Repair Contingency
This is I think the biggest unknown for all landlords. It is very difficult to track the big items (new roof, etc) over short periods of time.

Does anyone have any trade secrets/ideas that they would like to share to beat these numbers?

Some general ideas I have:
- Self manage (providing they are skilled at it)
- Keep tenants longer than average
- Get maintenance done for good price
- Discounted insurance
- Turn vacancies faster (this is a big overlooked one)
- Get above market rents
- Raise rents regularly

An example:
I know a landlord that has an average stay of 8 years versus 2 years. That makes his vacancy ratio 2% versus the average 8.3% (1 month a year) assuming a 60 day turn. He rents a bit under market to achieve this though?

Things I do:
- Self Manage
- Repairs are done by my flip workers at cost (I would assume I pay 50% of market value).
- Blanket insurance policy
- I am sometimes a bit more flexible with credit to get market++ rent. This has worked out very well so far.

Obviously, I am substituting my time and resources to earn some of this money that I could hire out.

There is no free lunch. A lower rent will decrease vacancy, but it doesn't come free.

Not paying utilities doesn't come free either. Tenants will lower the rent they are willing to pay if you pass these costs on to them. Nothing in life is free.

Bryan, thanks for linking this again. It is interesting, but I don't know how relevant this is for people who don't own huge multi-family buildings.

Salaries, Admin, Management, Marketing adds up to 17.1% which seems very high. That probably includes some maintenance in the salaries (for the onsite).

13% Vacancy & Concessions seems very high too. I'd imagine they are getting people in over-market with the concessions.

6.9% repairs & contract service + 6% capex seems about right.

Do they really mean 57% turnover per year????

I completely agree that you can beat the numbers on paper. The problem is, when you get to the underwriter they will not see the same discounted rates that you do. They will not look at it as you do all of your own maintenance for free. They will not factor in that you will manage your own place. They need to look at it like they will have to take it back and use the yellow pages to get stuff done! I am not sure about the breakdown, but I can tell you that we run some free and clear properties, residential and commercial, and the 50% rule is not far off if you run things right. Just my opinion.

See my comments in the original post. I do not work for free and my time is very valuable. I would estimate I spend about 20%-25% of my time managing my portfolio and for the amount it would cost me to hire that out I am very happy with the hourly wage I earn.

An underwrite for what? I already own the units. I am not requiring loans. My job is to maximize cash-flow and time so I can buy more units.

When/if I sell them, they will be sold to homeowners.

I am not debating the 50% rule. It really doesn't matter for this conversation. What do successful landlords do to be the most efficient/lowest cost producing landlords?

Steve,
Just in case there is a misunderstanding, my comment of do you work for free was not intended to be directed AT you, but a question to anyone asking the question you presented. Also, I agree that with a large number of units, self managing creates a job for you which could very well be a high paying one, I have no argument with you there. I only wanted to point out to those who may not be as experienced that self managing may or may not be the right move and for calculating values of properties, a self managed building being looked at be a lender (again not directed at Steve but anyone who needs a loan on such a property) or a buyer will toss in a management fee in the operating expenses.

If managing units was not profitable, there would not be any management companies so for Steve L, self managing is in essence, starting his own management company which he operates and at a nice profit as he stated.

Property management for 6-10% is low, IMHO. If you have a small number of units, you're looking at 10% of collected rents plus half a month or so to fill a vacancy. Maybe you manage to get multi-year tenants, I'm still waiting for that to to happen. So, if you have a no-vacancy turnover (I have had that happen), then you're looking at 10% of 12 months rent plus 50% of one months rent. That's 170% of 12 months rent or a little over 14% overall.

You want to sign up to be my PM, Bryan?

I actually think the pay rate for being a PM is quite good. Most months I spend zero time at all dealing with a tenant. Once in a while its a five minute phone call. A couple of times a year, its two hours to drive over and deal with something. Once a year I do a series of showings. I show once a week and schedule in everyone at exactly the same time. Usually about 4-6 showings to get a tenant. Counting drive time, time actually showing, screening, and then signing the least, that's maybe 15 hours. So, call it 20 hours per year. On a $1000 a month rental, 10% plus half a month is $1700 a year. That's $85 an hour. I'll take that.

More and more, I get my son (24 and married now) to deal with this and he gets that amount. My units still do OK, and its a big help for him.

If you're renting under market, you have to include "economic vacancy" in your list of costs. If you give free time (I often do, when its getting close to the end of the month), that's also an economic vacancy.

I do quite a bit of maintenance myself. Yeah, I know people say "do more deals" not "be a handyman". But often a handyman will charge you $100 to do a 10 minute job. Even if you spend an hour driving, 15 minutes at Home Depot and 15 minutes making a repair, that's equivalent to $66 an hour. And yes, that hour could well have been spent "Fringe" or "Swamp Loggers (I really want one of those feller-bunchers)", but fixing some minor repair isn't the end of the world. Many repairs are really trivial, and if it is something more serious, the having a look in person puts me in a better position for dealing with the handyman. Here again, this sort of work is getting turned over to my son.

As far as long term, big ticket items, I think you just factor it in as a constant amount. Roofs cost $5000 and last 20 years. Furnaces are $3000 and last 20 years. That's $400 per year for those two items. I have one house that I know is going to need a sewer line at some point and that's $5000. I'll build up that amount in its capital account and then get this done.

Has anyone in there actually looked at the data or do we simply use it as confirmation of the 50% rule?

For example, to counter a previous poster's claim regarding utilities. If I'm reading that properly, NOI on individually metered units is 56% versus Master metered units at 51%. So if you're charging $50 extra to cover the anticipated $50 in utilities you're really only collecting $25. Somehow you're also losing 5% on the remainder as well, maybe people are just really bad at pricing in utilities (land lords and tenants?). I can see offering info and advice like that being valuable.

Or how about Operating Expenses in Regions 2 and 5 (woohoo, go 5!) being 20 - 30% lower than other areas of the country? Are rents lower to match? (really surprised this report didn't break that out geographically). I can see investing in low property tax areas being advisable especially if you can maintain decent rents.

The data also shows a clear relationship between age and maintenance cost, but again no income data was provided (WEIRD!) The way I read that, older properties likely have lower expectations and therefore there is a bit less maintenance headaches (no need to keep the properties absolutely pristine to demand the "A" rents). If you can show a correlation between % rent increases at different levels and ages, that could be useful as well.

Lastly, while payroll dropped as size increased... I didn't see a correlation between size and operating expense. It was all over and for at least several years seemed to indicate smaller was better.

Thoughts? How relevant is this data to someone with 1 or 2 rental properties? Seems like the average size here was apartment complexes of 50 to 100 units at a minimum, not your typical duplex/quadplex where I'm starting.

When someone (usually new to the forum) says that they are going to save money by self managing and doing repairs, there is an automatic "is your time free?" question shot right back.

I agree with Mitch about otherwise wasted time and I use it for myself. But that philosophy individualizes an investor's analysis such that it is not applicable to larger scale investing. For those of us looking into growing our scale, we have to loose this mindset (eventually) and include the full operation costs. At what number of units you would need to change I can't say. I'm sure that would depend on sevaral variable external forces and personal goal factors.

On the other hand, there are two sides to real estate: investing and business. Providing the funds for the rental unit and colleting the profits is the investing side. Providing the time for management and maintenance is the business side.

If you pay a "business" 15 percent to manage your properties, do you think they are doinig it to break even? NO WAY! So, yes, if you do operate your rental management and maintenance businesses, you do come out more profitable than just investing in your properties since you now have two things going on. You have to know what profit margin the operations side generates before you "discount" that from your 50% expense. This is an independent analysis from the "50%" analysis. If you had seperate LLC's you might NOT dscount your profits from operations, but rather set up a different "income" stream. I'm not sure on the last part!

Also, if you are rehabbing units, there needs to be some accounting for the improvements as a positive effect on expenses. If you have a new roof or new HVAC system as part of your improvements and you plan on selling before these items require replacing, you should reduce the replacement cost effects of these items, still leaving some accounting for unforeseen events.

The biggest proponents of the 50% rule will most all tell you it is not a perfect rule, but a benchmark to work from.