General Rule of Thumb?

Question

What percentage do all of you experienced investors use as numbers for the following compared to the full loan amount? Any information would help.

-vacancy rate
-maintenance
-utilities
-property mgt
-other
-property tax
-insurance

Jeffrey K. · Answer

I have been looking for months in Milwaukee for properties that profit using the 50% rule.  Short of really bad neighborhoods, I have not found any deals that come close.

Michael Rossi · Answer

It's not a generalization, it is the most (the only) accurate data out there.  If you don't use that, what do you use?  How many evictions will a given unit have in a given year?  What will the vacancy rate be next year when we're deep into a recession?  How much damage will an angry tenant do when they leave this year?

Having said that, obviously you should look at the numbers that are knowable to be sure that there isn't something that will make the expenses even higher than 50%.  You can certainly know taxes, insurance, management, etc.

Good Luck,

Mike

Tyler Carpenter · Answer

Thanks again Mike.

Michael Rossi · Answer

I don't divide the expenses individually.  Vacancy rates change over time and with location.  Maintenance can vary greatly from one month to another (and one year to another if you only have a few rentals).  You missed a BUNCH of the expenses, such as damage done by tenants in excess of the security deposit, advertising, entity maintenance, legal fees, evictions, lawsuits, office supplies, etc, etc, etc.

Throughout the United States, operating expenses run 45% to 50% of the gross rents.  I use 50% for all the expenses and don't try to predict any particular expense for a given unit in a given year.

Mike

Tyler Carpenter · Answer

Well with this being said, how do you know when a good deal is a good deal and you can make it work? Because a generalization of just 45-50% is a nice generalization but what is looked at into detail to determine if you can make the numbers work?