Am I being too conservative in my analysis of rentals?

18 Replies

Hi All,  

I've been around for a while now and I'm taking action steps in getting my first investment property. I created my own rental property calculator in a spreadsheet which is roughly based on the calculator on the site. When entering the expenses, I'm wondering if I'm being too conservative and thus it is skewing my numbers to show that a property won't be as great. For example, for insurance, maintenance & repairs reserve, utilities, and PM, i generally assign 10% of the monthly rent to these. I also do a 1 month vacancy reserve every year too. Property taxes I usually try to calculate myself, but I found that my calculation is too high most of the time than the figure that is given by the seller. When exploring the marketplace, I find my expense assumptions to be significantly higher than the seller's are posting when they post their ROI/CF figures. So I'm thinking a good estimate is probably between what they're giving and what I'm using. What percentages/figures do you use when analyzing a rental property?

Thanks in advance!

napkin math we have done with rents at about 1200 or less 40 to 50% of gross for cost

real low rents and the number goes higher.. if you do better great but this should give you a reality number over a 10 year hold.  

most sellers scew the numbers and are not accurate. I am from Illinois and I am extremely conservative on my calculations to ensure worst case scenario all turns out well. I typically assign 10% for maintenance as well, another 10% for vacancy, reduce for property taxes (which are available online through assessor office) and then further reduce for insurance, and if multifamily any other utilities provided. After all this plus mortgage  payment reduction ( I typically only lay 20% down), I require a minimum of a 30% cash on cash roi. I typically negotiate to get my price right and find a few properties each year. At the end of day it is always better than this worst case and have excellent returns. Please note I get this in central Illinois and may be different where u are but being extremely selective has worked well for me so far. 

I can't say for sure in terms of your numbers vs. the seller's or whose are accurate, but it sounds like you're doing things harder than necessary, and less accurately. The only expenses you should have to guess on are repairs and vacancies. Everything else- find the actual numbers. Taxes can come from the county's tax assessor website, insurance you can get quotes, utilities typically should be on the tenants unless you're buying and MFR but if you have to include utilities you can do some digging and get more solid numbers than just guessing, and PM you should be able to know.

The more actual numbers you get, the more you'll have a feel for reality. Take the guessing out as much as possible (guessing is dangerous) and keep things easier at the same time.

@Cosmo Lee - With the limited information on what, when , where , how and who you are wasting time of everyone. I wish REI could be done successfully on spread sheet. Read following links for education true for any market. Try to network with the brave investors before you in the market you are targeting. Read @Jay Hinrichs post on his Midwest adventures and book on international investors from turnkey-review website.

https://www.apartmentlist.com/rentonomics/rental-i...

https://www.bloomberg.com/news/articles/2017-10-26...

https://wolfstreet.com/2017/11/01/biggest-us-citie...

https://www.biggerpockets.com/forums/311/topics/22...

https://www.biggerpockets.com/forums/52/topics/402...

https://www.biggerpockets.com/forums/594/topics/49...

Good Luck

Vivek

Definitely don’t use the seller’s numbers!

For insurance, I used $800/year for a 2 bedroom duplex and 1000 to 1200 for a starter Home.

Maintenance is dependent on the house. We bought a flip and maintenance doesn’t exceed $80/month — we just keep a 5k buffet in an account dedicated for major repairs.

It’s funny that we ALL have our own spreadsheets. I recently converted mine to a web app so that I can run numbers while touring a property: https://gocashflowapp.com

Thanks for the advice and links everyone!

As a lender, we use 25% for vacancy/rent loss, management, and maintenance.  As an investor, I apply more specific numbers.  The latter is the way to go if you really want to evaluate opportunities and make a sound decision.  Insurance will depend on the type of property, value/price, and certain aspects of it (fireplace, brick vs siding, etc.).  Having seen 100's of policies, I could help you estimate that if I knew more.  Taxes are straightforward as @Ali Boone mentioned, and the seller should have other expenses for you.  The longer they've owned the property, the more they can share.  But like many of us said, they might hold back a little.  Otherwise, the range for a maintenance reserve could be 5%-15%, depending on type of property, condition, size, income it brings in, etc.  The management fee allocation of course depends on whether you will self-manage or hire someone.  Unless it's out of state, I always self-manage....and these days, I am not interested in investing out of state (IL) anymore.   Less control = too many headaches.  Vacancy is the final factor...and the hardest to determine.  It really is market and submarket/neighborhood specific.  If I know the market you're looking to invest in, I likely could give you some good feedback.  I have property that over the 15 years I've owned it, has one unit or another vacant for a month at a time, for a total of 4 months (over that 15 years).....and then another property where I get a month vacant every 2 to 3 years.  I've also owned properties in other states where I am fighting vacancy on an annual basis. 

I know I'm not giving you clear direction there, but thinks it's smart to really be specific on each property based on what it is, where, type of tenants, condition of the place, etc.  Feel free to PM me when you have a property and can give you my 2 cents!

Originally posted by @Ali Boone :

I can't say for sure in terms of your numbers vs. the seller's or whose are accurate, but it sounds like you're doing things harder than necessary, and less accurately. The only expenses you should have to guess on are repairs and vacancies. Everything else- find the actual numbers. Taxes can come from the county's tax assessor website, insurance you can get quotes, utilities typically should be on the tenants unless you're buying and MFR but if you have to include utilities you can do some digging and get more solid numbers than just guessing, and PM you should be able to know.

The more actual numbers you get, the more you'll have a feel for reality. Take the guessing out as much as possible (guessing is dangerous) and keep things easier at the same time.

 Where do you get insurance quotes from? Anytime I've tried they wanted me to own the property.

Most stuff on the MLS is overpriced coupled with it being a seller's market. You have to look long and hard and sometimes you find something others missed. Most places for sale in the area I want to buy cost 180K and barely bring in 1800/month in rent. But one property I found had two houses on it and an extra garage, but it was hard to tell what was going on by the pictures. A lot of people passed it over but I went and saw it and realized I could rent it would for over $2200 and I got them down from 175k to 163k because it needed some roofing done.

@Michael Facchini Thanks, I may take you up on your offer if I feel I find a property I'm ready to make an offer on!  To answer everyone's question.  I'm looking at multiple locations but mainly in Cleveland, Indianapolis and San Antonio.  I'm just mainly looking for a rule of thumb when calculating expenses.  Of course each market will be different.

with over $50,000,000 under management I can tell you that on average B & C class assets with $650/mo-$1k/mo in rents per unit are gonna eat up about half your rental income to operate on an ongoing basis. Some properties more, some less. Sometimes the same properties Will have stretches of more & some will have stretches of less.

You have to understand there is an unlimited amount of variables in this business at all times. An exact return cannot be computed on a spreadsheet. 

Spreadsheets don't rent properties, tenants do. And tenants don't care about your Spreadsheets.

Scale up a decent sized portfolio & the good stretches of some properties will carry you through the rough stretches of others. In the end, it's gonna work out pretty well. Real estate is after all the industry with the most self made millionaires in the United States.

James Wise, Real Estate Agent in OH (#2015001161)
216-661-6633

@J. Lee do you account for Capex as well, or only 10% for maintenance to cover all needed repairs?

@Doug Woodville I call insurance companies and get quotes.  I also can get online quotes using USAA.com.  Otherwise I call and get quotes from allstate or other carriers.  They have never required me to own the property, since in order to close on a mortgage you need to already have insurance lined up for the property.  

Capex included within my maintenance calculation

Originally posted by @Samantha Soto :

@Doug Woodville I call insurance companies and get quotes.  I also can get online quotes using USAA.com.  Otherwise I call and get quotes from allstate or other carriers.  They have never required me to own the property, since in order to close on a mortgage you need to already have insurance lined up for the property.  

 Thank you!

Property management, taxes, insurance, mortgage and interest can all be directly quoted and that’s how you should do those.

I typically assign 10 percent of gross rent for maintenance and capex (total) and 8 percent for vacancy. Typically that averages out over a portfolio

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