I am poised to have the cash for my first Turn Key (or close to turn key property bought through conventional means), and I have a question about the numbers on deal analysis, as I have been analyzing tons of properties, and want a standard metric to use so I hold my standards.
I have seen people use everything from 5% for CapEx, Vacancy, Repairs, 10% for Property management, and just use real numbers for taxes and insurance (the big 6). I have also seen people just use the 50% rule only. I have also seen folks use 6%, 7%, 8% 10% etc for the "big 6", and any combo of those.
I would like to hear from current property owners with buy and hold rentals specifically about:
1. What numbers do/did YOU use for success (CapEx, Repairs, PM, Vacancy)
2. What is YOUR minimum "go" criteria for (a) Cashflow per door and (b) Cash on Cash return on an investment property (assuming 20% down financed)
Look forward to hearing what other have used with success in their buy and hold portfolios, thanks!
@Zachary Dahlke For me the numbers vary by property. If I find a turnkey home built in 2010 I'm going to use lower capex/repair numbers then if it were a turn of the century home. Starting out, you don't have a number of properties you can use to create historic averages for what you've spent on those things so you try to make the best estimated guess based on the property you have and your overall risk tolerance.
1. I bought a turnkey property earlier this year and used the following metrics: vacancy (5%) which is average for that area, PM (10%), CapEx (8%), and Repairs (8%). Utilities are all covered by the tenant. These numbers are lower than what I was using for many other properties because it was recently renovated as a turnkey property so CapEx should theoretically be lower.
2. My minimum criteria for cashflow per door is $150, though with that I'd like to see options to build in some appreciation and increase the numbers. Cash on Cash numbers should be right around 10% and above for me.
The number in use to analyze a deal are
8.3% vacancy (one month per year).
12% property management
Capex depends on condition, but generally $50 - $100/mo (percentage is a bad metric for this, lower priced rental still need the same major systems replaced at the same intervals)
Mainenance, same as capex
As far as a go for me.... net cashflow of $150/mo, with 100% financing. If I have to buy that cashflow (downpayment), it's a no go.
Thanks for the detailed response! That super helpful. I hear what you mean on the Vacancy and PM nunbers make sense. I hear what you are saying on CapEx too, cause i guess a water heater or roof on a house getting $2000/month in gross rent will really cost about the same as on a house yielding $1000 gross rent.
When you said $150 per unit cash flow with zero down, and you would not "buy the cashflow" do you mean you calculate as if you have no cash in the deal, or do you actually not put any cash into the deal?
@Scott Passman thanks for the real world info. I am looking do buy Turnkey most likely so I appreciate the comparison.
It makes sense that the CapEx would be lower for a renovated home (TK) or a newer build.
Have you found it challenging to find turnkey properties that will yield 10% ConC using those metrics and cash flow minimum? Up to this point I have been trying to hit those numbers when analyzing take properties, and it seems quite difficult, even in different areas.
What market are you TK investing in if you don't mind?
@Zachary Dahlke the 50% rule is nothing more than a quick, back of the napkin way to get a quick idea if a deal will pencil out and shouldn't be used for anything more than that. The assumption you use will depend on a number of factors. Vacancy rate will depend on your local market, neighborhood and class of property. Low end neighborhoods will generally have higher vacancy rates. CAP Ex will depend on the condition of the property and how long you plan to hold it and it's current condition.
1. I don't factor capex in. I've got 5k in reserves for each property, I know I'll spend it around every 10-30 years, so I leave that out of things. Repairs 3-10% depending on the condition of the property. If it's an averagely kept property I factor at 5%. PM 8%. Vacancy (this is specific to my area of course) 5%.
2. I shoot for $150 a door! I focus more on cap rate and hope for 8% in B or C class, and 7% if I'm going A class.
Thanks for the input! Absolutely agree on the variation in CapEx and vacancies, just interested in what people are crunching numbers on as a general rule.
Thanks for the response! Interesting way to do the numbers, by holding cash reserves and just removing it from the calculus of Cashflow, ConC, Cap rate etc.
And good point on the Cap rate, that is obviously a clear metric along with ConC to compare apples to apples on a property.
When you both say vacancy varies, I agree, but when you are evaluating a property to decide if you want to buy it, are you using the vacancy rate from your property manager, the Turnkey provider, or some general knowledge you have from elsewhere (experience)?
There are lots of 'rules of thumb'. Some work better when you have zero to a few properties. Once you have a portfolio, you might change the reserves and other factors.
I like the point Mike made above. The rules are really there to separate the dead ends from the possibles.
A friend also made a point in a live meeting that he does not like X% of the rent for a reserve. In one market X% would not cover the cost of a new furnace. It would take 100% of the rent for 5 months. In a high priced market where he has property, a fraction of the monthly rent would fund a new furnace.
Once you have some properties in a specific market, you can get a better sense of what the right ratios are for your portfolio in that market with the current management. In other words, the guestimates start to be refined into your own reality.
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