New investor just looking for a few questions to be answered.

9 Replies

Hey guys, I am a new investor from Vermont still trying to find my first deal. I am interested in buy and hold investing and found a property that might be a good deal if I can get the seller to drop down the price some. The property I am looking at is a triplex and I would live in one unit for the lower down payment. I just have a few questions to help me with running the numbers on a property. 1. After I figure out all expenses how much should I set aside for cap ex? I see a lot of people saying 15% of monthly gross rental income. 2. How much should I set aside for vacancy? I also see people saying 15% but this seems like a lot of money, do most people need this much set aside for all rental homes? 3. How much for basic repairs such as repainting and carpet replacements? Another 15%? 4. What is a good cash flow on property like this to start, after putting everything aside if the property cash flowed 200 a month do you think it is worth it? Thanks for any help!

Contact a Property Manager in the area to ask about vacancy rates. While you have them on the phone, ask their opinion of the property. They’ll be able to give you a sense of the types of tenants you’ll be seeing.

Capex really depends on a lot of factors, such as when the property was built, and when major items (roof, HVAC, etc) were installed or last overhauled. I wouldn’t buy a property without knowing those things. If the roof and HVAC are on it’s last legs, 15% for capex probably won’t save that deal.

Repairs are also often dependent on the year the home was built. The older the house, the more repairs likely needed. They also depend on the class of tenant you have. Higher class tenants tend to take better care of their property and often handle many repairs on their own. Again, the PM should help confirm all of this for you.

It’s also hard to assign a % for repairs and capex without knowing the value of the property. As a percentage, repairs and capex for a $500k property will be much less than for a $200k property. E.g., replacing a toilet should cost roughly the same in each of those properties. As a result, the repairs as a percentage would be much less for the more expensive property. What’s the property worth?

@Mike Warder most of the properties in my area were built in the early 1900s so they all are a bit older. The property is currently going for 200,000, I would like it get it for 190,000 though so it all depends on that.

Because I am doing the owner occupied if I buy the property, is there a certain point that the PMI will drop off because I’m not doing 20% down?

@Shane Brown I tend to look at cap-ex from a slightly different perspective, sure you need to set aside something (10%-15%) but the reality is that you need to have money on-hand for when things go wrong.  Certain areas like a "broken dishwasher" always can seem like expenses when it comes to actually buying a replacement (i.e. low dollar items).  However, if you're <5 years away from a roof replacement then saving 15% of gross rents might not allow you to build reserves fast enough for that eventuality.  The same goes for higher dollar items like plumbing issues, HVAC issues, etc.  So you can use a (relatively) arbitrary percentage doing the analysis but make sure you have money on hand for high-dollar issues.

Where I invest vacancy is pretty darn low. However, you still have some clean-up to do in between renting out the units, it takes some time to show, and then there's some time before a tenant moves in. So I basically ballpark 8% (1 month/12 months) because a lot of my apartments turnover annually. If I had an SFR in the same area I'd probably think <8% because tenants tend to stay longer. Since I don't know a thing about Vermont it's hard to guess what your local vacancy rate is.

When it comes to things like painting and carpet so much of it depends on who is doing the labor.  If you're sharing walls and can repaint yourself when a unit turns over, well, it's really cheap.  It might take you a while and trim is a pain but the *actual* cost of paint isn't high.  It also doesn't exactly cost a ton of money to rent those ugly professional grade carpet cleaners.  But paying someone to paint?  That could be $1K-$2K pretty easily.  And for what it's worth, if the carpet is just "dead" you should look at ceramic tile or another solution that is a little more durable.

You will find the older homes do require a lot more attention in terms of repairs. As for setting a certain percentage, like Mike said, it depends on a lot of different factors. 

For us, in both of our duplexes in St Albans City, our longest vacancy (outside of a planned, one month marathon rehab) has been 4 days since 2013 when we purchased them. There is certainly a demand for apartments that are well managed and in good shape in St Albans City. That said, it is important to make sure the apartment can carry with vacancy built into it. I agree with Andrew, that 15% seems high although if you are taking time to do the work, you might have to plan for these vacancies. 

As for PMI, mine drops off at 80%. I haven't used FHA but I have heard depending on the financing, some loans have PMI for the life of the loan. We used New England Federal Credit Unions ARM loan that only required 5% down for our owner occupied duplex.

few things here if you're going to house hack, run the numbers assuming you won't live there so when you move you know it's a good investment. If while you're living there the place doesn't cash flow, or only barely does, that's okay because you're living there taking up 1/3 of the potential gross rents. %'s to set aside really do vary by building. my normal numbers on my analysis is 9% vacancy (1 month basically), 5 to 10% cap ex, 5 to 10% repairs, and 10% property management (even if you plan on pm yourself). after that I set my minimum at $100/door free cash flow, 10% ROI. If I can't get that then I move on. Getting a 200k ask for 190k shouldn't be too hard, that's only 5% off. PMI will depend on your lender and loan, but if it comes down to it worst case scenario, once you get 20% equity you can refi to get rid of it depending on interest rates at that time.

@Andrew Johnson
Yeah I just don’t want to over price capex in a rental unit or vacancy rate and miss a good deal because I calculated wrong. Or the opposite and not save enough thinking something is a good deal when there isn’t enough cash flow for the upkeep.
Most of the repairs as far as painting and flooring, the basic stuff I will be able to do myself. Fixing a heating unit stuff like that I will have to outsource. Thanks for the input though.

@Amy Paradis so you guys haven’t had a problem finding new tenants and filling vacancies in the area?
Also I think I looked at Vermont Federal and decided on peoples trust because at the time I could get the best interest rate there but that was about 6 months ago so I’ll have to check back. Also I am not sure if PMI drops off on their FHA loans so I’ll have to check that out.

The replies contain a lot of good advice.  

I agree with @Mike Warder that cap expense as a percentage of rent does not make sense.  Same for maintenance.  

What my calculations show is in low rent areas like much of the Midwest expenses run ~50% of rents but in high rent areas such as coastal So Cal expenses run ~30% of rent.   The difference is mostly in the cap ex/maintenace as a percentage of the rent is less in the high rent areas.  

Regardless of the numbers you use for maintenance and cap expense you must have the means to cover for murphy’s Law.   For example It is possible to get a large expense such as a slab leak in the first month of ownership.  You must be able to pay to get it fixed even if pay means put the repair on your credit card and pay it off over the next few months.  

My point is items break sometimes at inopportune times (no one’s fault).  Sometimes these repairs are not cheap (such as a slap leak).  I have experienced 3 slab leaks in the last 4 years at an average cost over $5k.  Hopefully you do not encounter any large expenses until long after purchase but you need to be prepared in case you do.  So make sure you are not financially over extended. 

Good luck

@Shane Brown We haven't had any issues. The 4 day vacancy we did have was due to poor planning on my part but we were able to fill it once we discounted the rent a little for the first month. The winter is a much more challenging time to rent and we recently came close to a vacancy but found a great tenant just before we ran out of time. In general, we try to plan at least 60 days ahead of time for any vacancy coming up which means reaching out to tenants (if we want them to renew well ahead of time) and advertising early. Once we are 45 days away from the vacancy, we post it wherever we can. Renting from December-February is just more challenging in VT as no one wants to move in this cold/sleet/disgusting-ness. 

The biggest mistake we made as new investors was taking a tenant just to avoid a vacancy. Trust me, that was a $15,000 lesson. It is always better to leave a place vacant for a few months then take a less-then-qualified tenant. I've heard it is a common mistake for rookie investors as a place not cash-flowing is a fear. In hindsight, a vacant month or two would have been A LOT cheaper. 

@Shane Brown Hopefully, you'll get your first deal soon. 

To answer your questions

  1. The range for CapEx is 5-10% depending on the property's condition (recently renovated will lean more on the 5% side)
  2. Vacancy also hovers around 5-10%.
  3. Repairs, in general, are tough to anticipate but setting aside 10% should suffice 

I think its good practice to have an underwriting criterion such as if the property doesn't cash flow X amount you won't acquire it. 

Also, you should bear in mind that the lower 3.5% down from FHA loan will advertently affect your cash flow.

Hope this helps. Goodluck. Thanks! - Ola 

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