Using Proforma Calculators

16 Replies

Hi All!

I'm new to buy and hold investing. I'm using a excel spreadsheet that has a conservative 10% vacancy reserve and 10% maintenance reserve every month. I've spoken with turnkey companies that say they use a much lower number: 5% vacancy reserve and 5% maintenance reserve.

I get that I am being conservative and using 10% as a worse case scenario but I don't want to turn away good deals if they are matching my criteria otherwise. A fully rehabbed turnkey property will probably not need the maintenance reserve of 10%.

How do you all crunch the numbers so it makes sense to you? Thanks in advance!

Calculators and the like all all rough guides. You can assume half your rents will go to costs on a decent rental property in a decent area. Thing is that is an average. My portfolio typically performs pretty close to that. Some do better some worse, Some are on auto pilot for awhile then go bad for awhile and vice versa.

If you take a small sample like 1 property over a small time period it may be vastly different. You can have a house have no turnover or repairs for years then get hit with 2 evictions and horrible damage right in a row.

Don't forget 

Spreadsheets do not rent properties. Tenants rent properties, and tenants do not read your spreadsheets.

Originally posted by @James Wise :

Calculators and the like all all rough guides. You can assume half your rents will go to costs on a decent rental property in a decent area. Thing is that is an average. My portfolio typically performs pretty close to that. Some do better some worse, Some are on auto pilot for awhile then go bad for awhile and vice versa.

If you take a small sample like 1 property over a small time period it may be vastly different. You can have a house have no turnover or repairs for years then get hit with 2 evictions and horrible damage right in a row.

Don't forget 

Spreadsheets do not rent properties. Tenants rent properties, and tenants do not read your spreadsheets.

Hi James. Yes, I am new to REI but I like to be conservative because I have heard of scenarios like you speak of. I appreciate your insights and I will use the "Spreadsheets do not rent properties..." saying to keep my focus where it needs to be: on the actual property and tenants. Thanks so much!

Originally posted by @John Hodson :

Hi All!

I'm new to buy and hold investing. I'm using a excel spreadsheet that has a conservative 10% vacancy reserve and 10% maintenance reserve every month. I've spoken with turnkey companies that say they use a much lower number: 5% vacancy reserve and 5% maintenance reserve.

I get that I am being conservative and using 10% as a worse case scenario but I don't want to turn away good deals if they are matching my criteria otherwise. A fully rehabbed turnkey property will probably not need the maintenance reserve of 10%.

How do you all crunch the numbers so it makes sense to you? Thanks in advance!

 Hi John-

Yes, I would have to say your numbers are conservative, this was my initial reaction, however, you have to consider the area and the overall quality extent of the Turnkey asset you are evaluating. 

We use  a conservative metric of 5% vacancy and 5.5% annual maintenance reserve. Now, this may not apply to everyone, as we are really adamant about how we screen tenants and the renovations we complete must meet our high standards, we do not allow anything to be untouched, we leave no room for surprises, we even encourage our investors to complete home inspections so we can capture any and all additional aesthetic items we may have missed on the front end, so we mitigate our maintenance and turn over risk in the long term. We address any inspection findings through a removal of contingency addendum process to insure the home is in tip top condition. 

Not everyone, is so scrupulous, we just don't like messing with the maintenance. Furthermore, what we are seeing is that better and more sophisticated renovations = tenants stay longer= less turn-over= more money for the investor. The tent screening is just as important as the renovation = timely payments and they tend to be better ambassadors of the property. 

Just to give you an idea, we have hard scientific data about our Turnkey and the methodologies we implement have scientific results:

Avg. Tenancy = 24.125 Months

Avg. Monthly Collection Rate = <1%

Avg. Annual Maintenance Exposure = $700

Because we spend so much time making sure we are buying in the right areas, we implement uniform construction through all of our properties (same sinks, faucets, lights, paints, floors etc) we save huge $$$$$$'s in the long run and the products we try to install are resilient products designed to withstand multiple turns without loosing the appeal. 

Do your homework, make sure you ask the right questions, and anyone you work with should be able to give you hard scientific data, if they have a sophisticate and well oiled operation.

Feel free to inbox me or email me with any questions.

#TeamTurnkey

John Hodson The appropriate percentages depend on the price point of the property, but assuming you're in the $50-$150k range, I'd go with James Wise comments.

FWIW, on our $2500/m rentals, we allot 5% maintenance and 7% Capex. We rehab just about everything after purchase as well, but that just resets the same clock on the Capex costs that will still accrue.

John Hodson The appropriate percentages depend on the price point of the property, but assuming you're in the $50-$150k range, I'd go with James Wise comments.

FWIW, on our $2500/m rentals, we allot 5% maintenance and 7% Capex. We rehab just about everything after purchase as well, but that just resets the same clock on the Capex costs that will still accrue.

And, we're seeing vacancy in the 2% range over the past 5 years, but that's more of a local market thing than a general rule.

@Steven Gesis :

That's great to hear you have a system down and it sounds reliable. I'm definitely going to see how the turnkeys I'm using will perform in the long run. I have already adjusted maintenance and vacancy on one prospect so I could get a sense of what I'm getting into. All is well and I am excited to keep moving forward.

Thanks for your share!

Originally posted by @Justin R. :

John Hodson The appropriate percentages depend on the price point of the property, but assuming you're in the $50-$150k range, I'd go with James Wise comments.

FWIW, on our $2500/m rentals, we allot 5% maintenance and 7% Capex. We rehab just about everything after purchase as well, but that just resets the same clock on the Capex costs that will still accrue.

And, we're seeing vacancy in the 2% range over the past 5 years, but that's more of a local market thing than a general rule.

 That sounds better than I expected. My PM team says they screen very thoroughly so I'm hoping quality tenants will make all the difference. Thanks!

I should have mentioned - on the newly rehabbed properties, virtually all of that 7% capex reserve just sits in a dedicated account without getting spent.

Many people quoting their numbers or selling property lump this into their yearly "cash flow" or CoC return percentage. It's the one odd ball line item on the P&L statement since it shows up as a pre-paid expense but you still get to pay taxes on the amount you reserve each year.

Originally posted by @John Hodson :
@Steven Gesis:

That's great to hear you have a system down and it sounds reliable. I'm definitely going to see how the turnkeys I'm using will perform in the long run. I have already adjusted maintenance and vacancy on one prospect so I could get a sense of what I'm getting into. All is well and I am excited to keep moving forward.

Thanks for your share!

 John-

Sounds terrific, yes we do have a reliable and functioning system. The most important takeaway is that it is a system, like a good manufacturing factory, this allows us to enhance the experience all around, as we implement uniform and cost savings modals across the entire spectrum of our exclusive management system We can track and analyze all of our various systems, evaluate the metrics continuously and look for deficiencies. We are able to transfer these short term and long term savings to everyone, as our systems enhances as does the investors, this is the key to fruitful and positive relationship with your turnkey operator. You should view your relationship as a joint venture or partnerships, you must treat it as a business and operate as lean as possible, while maintaining the highest level of quality.  Be patient and  empower your property manager to keep your tenant happy. A happy tenant, is a paying tent, is a long term tenant.

Much luck, happy to share.

#TeamTurnkey

@Steven Gesis what % if any of your tenants are sec 8 or other subsidized housing ?

@John Hodson  I always use 50% as James stated if you do better go buy yourself a nice dinner.. but your not dissapointed or shocked if you set your margins so tight and you don't hit them.

There is only so much that can be done ... at the end of the day a poor tenant can throw those numbers right out the window.

My current portfolio ( and am liquidating all my holdings currently) has 7 A class SFR's left. generally you can get pretty lean with this tenant base top of the spectrum on rents etc..

However last year I had one tenant go banana's on me.. no fight or argument and they destroyed the house. did 40k in damage.. Now I got insruance to cover it because the insurance adjustor agreed it was not normal were and tear and it was intential.. they also went after this tenant criminally  not sure what happened but it can happen in the business.

Renters are Renters are Renters always remember that.. we do the best we can. but some wacko's do slip through the most stringent systems.

Originally posted by @Jay Hinrichs :

@Steven Gesis what % if any of your tenants are sec 8 or other subsidized housing ?

@John Hodson  I always use 50% as James stated if you do better go buy yourself a nice dinner.. but your not dissapointed or shocked if you set your margins so tight and you don't hit them.

There is only so much that can be done ... at the end of the day a poor tenant can throw those numbers right out the window.

My current portfolio ( and am liquidating all my holdings currently) has 7 A class SFR's left. generally you can get pretty lean with this tenant base top of the spectrum on rents etc..

However last year I had one tenant go banana's on me.. no fight or argument and they destroyed the house. did 40k in damage.. Now I got insruance to cover it because the insurance adjustor agreed it was not normal were and tear and it was intential.. they also went after this tenant criminally  not sure what happened but it can happen in the business.

Renters are Renters are Renters always remember that.. we do the best we can. but some wacko's do slip through the most stringent systems.

Hi Jay, great question! We have 0% section 8 or subsidized housing, voucher, eden, etc. We do not operate in this space, we only have cash paying tenants. Section 8 is just not our business, we place a LOT of love into the units on the front end. It is not to say section 8 is bad, it is just to big of a gamble for our system We have a very strict screening and placement policy, obviously all within the equal housing parameters.  

You could not have said it any better, you certainly want to set achievable and realistic parameters on your projections. Again, you have to consider the overall existing condition and be very honest about it. Do NOT trick yourself or fool yourself you have age if you really do not have a top notch and well maintained property. Give yourself a real view into your property hire a property inspection service to give you a report. One of the ways we always test ourselves and make sure we have all the loose ends buttoned up and all the screws tightened is by encoring our investors to conduct 3rd party home inspections. You still want to give yourself some cap space for maintenance and continued support. Keep in mind that you will be covering some of the continual maintenance during your tenant turn-over. The more realistic you are with yourself the better the outcome no doubt. I think it important to note that you should not cut corners on your improvements, the better you complete them the more compelled your tenants will be to stay longer as well.

So critical to note, a poor "bad" tenant can ruin everything and more, this is a hyper important element that must not be taken lightly, you do not just want to place a tenant you want to place a high quality tenant. A high quality tenant will not only stay longer, be timely with their payment responsibility but will also typically leave your unit in much better condition on the way out. A high quality tenant will not have area on to leave if your home is well maintained and offers the necessary competitive amenities as expected with modern living.

Never had a severe case as you have encountered Jay, however, this is not something that is within anyones control you will always have outliers and unexpected conditions, you must be prepared for the bad as such as you are anxious to only have good. Being protected and handing the stain is key. 

You say it best, renters are renters and things happen, its about how you handle the situation and yourself when things do happen.

@Steven Gesis  as turn key matures I see other companies moving away from Sec. 8. Memphis invest has indicated they no longer manage section 8 tenants in Memphis not sure about their TExas operations.

I think with Sec. 8 you either have to go ALL IN and be an expert or avoid it.

Now were we live in Orygun.. there is very little section 8 or subsidized housing. and tenants with vouchers find it extremely difficult to get a rental.  this also is what creates subsidized housing projects that are built with state bonds.. the open market won't put up with the risk of the tenant base so govvie jumps in and lures investors into bond deals.

Also, a key point on Section 8 is to understand that it's not the same from area to area in terms of the experience you'll have. Section 8 in Baltimore is VERY different than it is here in my hometown of Memphis. 

I swore off Section 8 years ago after several bad experiences, but they go all the way down to the root of who's running the section 8 office here in Memphis. In other areas, you'll have a different experience b/c you may have better people running it better.

Just a factor to consider.