Vacancy Rate - what % to use?
Laura GlasscockPro Member
Victoria, VA · Member since 2023 · 3 posts · 3 votesVacancy Rate - what % to use?
Most Popular Reply
Accountant · Indianapolis, IN · Member since 2019 · 247 posts · 134 votes
7moReally common question for people just getting started with the calculators. The most important thing to understand is that vacancy and maintenance are not just about what you expect to happen, they are about protecting yourself when things do not go as planned.
Even if you have a tenant ready to go, you should still use at least 5% for vacancy. Tenants move out, life happens, and you will have turnover eventually. Most experienced investors use 8 to 10% as a standard. On maintenance, a freshly rehabbed BRRRR is a great situation but 5 to 10% is still the right number to use because systems age, appliances break, and small things add up faster than you think. The calculators are not meant to reflect your best case scenario, they are meant to tell you if the deal still works when reality hits. If a property only looks good when vacancy and maintenance are zero, it is not a good deal, it is a hope.
37 Replies
- Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes7mo
@Laura Glasscock, a few thoughts:
1. You want to underwrite conservatively to start and then possibly make SMALL adjustments later.
2. Rule of thumb numbers would probably be 5% each for Vacancy, Repair, And Cap Ex or 15% total of incoming rent.
3. You should not just use these numbers for underwriting a deal but set this money aside in reserves for when you need it.
4. You think you will have no "vacancy" but you will. Markets aren't always hot for rentals even if its a seasonal difference. In addition, you will at some point have a bad tenant who doesn't pay and where you need to evict. In essence, a nonpaying tenant could fall under "Vacancy" as well. Also, its difficult to always rent a place before it becomes vacant. It is certainly possible but likely will not always be and you also often need a little time between tenants to do some work on the property.
- 7moAlfath AhmedBusiness MemberReal Estate Agent · Columbus, OH · Member since 2022 · 1k+ posts · 1k+ votes
Quote from @Laura Glasscock:
Help please - new to running the calculators. How do you know what % to enter for vacancy rate and maintenance? I don't think we'll have any vacancy (so much interest already and I have a tenant). We are BRRRR-ing so should be very little maintenance after completed. Would appreciate some guidance...thx!!
It depends. You can probably chaptgpt the normal variances for your desired market.
I typically use 5% for vacancy and 10% for maintenance, and 7% for PM because that is what my PM charges me.
ReafCo | Ahmed Group 536 Reviews - Victoria, VA · Member since 2023 · 3 posts · 3 votes7mo
Sounds like very good advice, Kevin! Sure appreciate the insight and quick reply. Thanks to both of you for answering. I will have more questions in the future, I'm sure.
- 7moDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votesYou can google vacancy rates in the area of your rental. No place has zero vacancies. In addition, small unit count LLs typically cannot perform tenant flips as fast as large count LL that may have their own maintenance stall. As a small unit count LL, you may want to underwrite with a higher vacancy than the average vacancy for your area (underwriting should be conservative).
Quote from @Laura Glasscock:
Help please - new to running the calculators. How do you know what % to enter for vacancy rate and maintenance? I don't think we'll have any vacancy (so much interest already and I have a tenant). We are BRRRR-ing so should be very little maintenance after completed. Would appreciate some guidance...thx!!
even if a unit is brand new, when it is put into service the lifespan has started on every component. This implies you need to allocate for this usage otherwise you have a misleading cash flow estimate for sustained holding costs. Maintenance/cap ex when properly allocated is a high expense. In my market a new, small 2/1 attached unit has a maintenance/cap ex if ~$400/month per my lifespan/cost calculations.
Maintenance and cap ex should not be based on a percentage point of rent, it should be a dollar amount that can have a percentage chosen to match the calculated cost. Here is why:
Condition, size, class of tenant, number of units (Kitchens have significant impact on maintenance/cap ex), type of exterior, flooring, etc all have a larger impact on maintenance and cap ex than the rent does.
Same city, similar yard, 2 properties: 3/2/2 in class d area rents for $2.5k/month, 3/2/2 in class A area rents for $5k/month. Which do you think will have the lower maintenance/lower cap ex. My guess is virtually always the higher class an area property will have the lower maintenance/cap ex.
Same city one a small waterfront 2/2/1 beach cottage on a small lot rents for $6500/month. Inland a 5/3/3 with a large lot with a pool rents for $6k. Which do you think will have maintenance/cap ex? Seems obvious.
Large unit count properties such as large apartment complexes with maintenance staff they have much lower cap ex than lower count units. Do not apply NAR apartment numbers to small unit count properties.
Good underwriting is critical to understanding the performance of real estate assets and determining if a property is worth pursuing. This underwriting includes deriving the maintenance/cap ex allocation. I will add it is higher than virtually every new investor believes and on cheaper markets 5% maintenance and 5% cap ex is not near enough.
good luck- Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes7mo
Quote from @Dan H.:
You can google vacancy rates in the area of your rental. No place has zero vacancies. In addition, small unit count LLs typically cannot perform tenant flips as fast as large count LL that may have their own maintenance stall. As a small unit count LL, you may want to underwrite with a higher vacancy than the average vacancy for your area (underwriting should be conservative).Quote from @Laura Glasscock:
Help please - new to running the calculators. How do you know what % to enter for vacancy rate and maintenance? I don't think we'll have any vacancy (so much interest already and I have a tenant). We are BRRRR-ing so should be very little maintenance after completed. Would appreciate some guidance...thx!!
even if a unit is brand new, when it is put into service the lifespan has started on every component. This implies you need to allocate for this usage otherwise you have a misleading cash flow estimate for sustained holding costs. Maintenance/cap ex when properly allocated is a high expense. In my market a new, small 2/1 attached unit has a maintenance/cap ex if ~$400/month per my lifespan/cost calculations.
Maintenance and cap ex should not be based on a percentage point of rent, it should be a dollar amount that can have a percentage chosen to match the calculated cost. Here is why:
Condition, size, class of tenant, number of units (Kitchens have significant impact on maintenance/cap ex), type of exterior, flooring, etc all have a larger impact on maintenance and cap ex than the rent does.
Same city, similar yard, 2 properties: 3/2/2 in class d area rents for $2.5k/month, 3/2/2 in class A area rents for $5k/month. Which do you think will have the lower maintenance/lower cap ex. My guess is virtually always the higher class an area property will have the lower maintenance/cap ex.
Same city one a small waterfront 2/2/1 beach cottage on a small lot rents for $6500/month. Inland a 5/3/3 with a large lot with a pool rents for $6k. Which do you think will have maintenance/cap ex? Seems obvious.
Large unit count properties such as large apartment complexes with maintenance staff they have much lower cap ex than lower count units. Do not apply NAR apartment numbers to small unit count properties.
Good underwriting is critical to understanding the performance of real estate assets and determining if a property is worth pursuing. This underwriting includes deriving the maintenance/cap ex allocation. I will add it is higher than virtually every new investor believes and on cheaper markets 5% maintenance and 5% cap ex is not near enough.
good luckI will disagree with @Dan about maintenance and cap ex and here is why:
1. First, anything can be boiled down to a % of rent. You may adjust it higher or lower based on factors specific to your property, market, or approach but a % is fine to use.
For a mom & pop landlord with few units it isn't reasonable or even possible for them to have the information or experience needed to calculate a specific dollar amount with any accuracy for these items.
Using a rule of thumb for money to set aside from rent and allocating some reserve funds is where the average landlords are going to start.
2. A more expensive higher class property likely has more expensive finishes meaning the same damage caused by a tenant in a higher class property costs more in materials to repair.
3. A higher class property in a higher class area is likely to have higher labor costs to repair and for better finishes require someone more skilled to do the repair. Where a handyman can repair/replace a damaged section of vinyl floor you will hire a specialist to repair/replace a section of real hardwood flooring.
4. CapEx is again likely to be similar between properties for many aspects. The roof wears out at the same rate in a poor neighborhood as a wealthy one.
However! On a higher class home, there may be some MORE expensive CapEx items to budget for versus the typical B/C class home. The high class home might have central air, a super high efficiency furnace, high end appliances, triple pane windows that need to be of a certain type specified by the HOA. All of those things mean that the Cap Ex cost to replace those things will be grossly MORE for the high class home versus the low class. Add to that #3, where the labor costs are likely to be more.
5. Another reason that a rule of thumb % makes sense for these items is that you use this when you underwrite a deal before purchase. You have no history and not enough specifics to delve deeply to derive a dollar amount based on actuals.
6. Some experienced investors in cheaper markets believe that 5% each on CapEx and maintenance can be MORE than enough! It can be MORE than enough if you are local and hands-on or if you can at least manage the work closely. If you choose your finishes carefully and if you craft your management approach to mitigate issues.
You are correct in some instances, especially for out of area landlords who use a PM or who don't have the knowledge, experience, or ability to manage these issues well that it can very easily cost MORE.
That is why 5% is a reasonable "rule of thumb" because some landlords in a cheap market might bring these in at 3-4% while others might be 6-8% each.
- 7moDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Quote from @Kevin Sobilo:
Quote from @Dan H.:
You can google vacancy rates in the area of your rental. No place has zero vacancies. In addition, small unit count LLs typically cannot perform tenant flips as fast as large count LL that may have their own maintenance stall. As a small unit count LL, you may want to underwrite with a higher vacancy than the average vacancy for your area (underwriting should be conservative).Quote from @Laura Glasscock:
Help please - new to running the calculators. How do you know what % to enter for vacancy rate and maintenance? I don't think we'll have any vacancy (so much interest already and I have a tenant). We are BRRRR-ing so should be very little maintenance after completed. Would appreciate some guidance...thx!!
even if a unit is brand new, when it is put into service the lifespan has started on every component. This implies you need to allocate for this usage otherwise you have a misleading cash flow estimate for sustained holding costs. Maintenance/cap ex when properly allocated is a high expense. In my market a new, small 2/1 attached unit has a maintenance/cap ex if ~$400/month per my lifespan/cost calculations.
Maintenance and cap ex should not be based on a percentage point of rent, it should be a dollar amount that can have a percentage chosen to match the calculated cost. Here is why:
Condition, size, class of tenant, number of units (Kitchens have significant impact on maintenance/cap ex), type of exterior, flooring, etc all have a larger impact on maintenance and cap ex than the rent does.
Same city, similar yard, 2 properties: 3/2/2 in class d area rents for $2.5k/month, 3/2/2 in class A area rents for $5k/month. Which do you think will have the lower maintenance/lower cap ex. My guess is virtually always the higher class an area property will have the lower maintenance/cap ex.
Same city one a small waterfront 2/2/1 beach cottage on a small lot rents for $6500/month. Inland a 5/3/3 with a large lot with a pool rents for $6k. Which do you think will have maintenance/cap ex? Seems obvious.
Large unit count properties such as large apartment complexes with maintenance staff they have much lower cap ex than lower count units. Do not apply NAR apartment numbers to small unit count properties.
Good underwriting is critical to understanding the performance of real estate assets and determining if a property is worth pursuing. This underwriting includes deriving the maintenance/cap ex allocation. I will add it is higher than virtually every new investor believes and on cheaper markets 5% maintenance and 5% cap ex is not near enough.
good luckI will disagree with @Dan about maintenance and cap ex and here is why:
1. First, anything can be boiled down to a % of rent. You may adjust it higher or lower based on factors specific to your property, market, or approach but a % is fine to use.
For a mom & pop landlord with few units it isn't reasonable or even possible for them to have the information or experience needed to calculate a specific dollar amount with any accuracy for these items.
Using a rule of thumb for money to set aside from rent and allocating some reserve funds is where the average landlords are going to start.
2. A more expensive higher class property likely has more expensive finishes meaning the same damage caused by a tenant in a higher class property costs more in materials to repair.
3. A higher class property in a higher class area is likely to have higher labor costs to repair and for better finishes require someone more skilled to do the repair. Where a handyman can repair/replace a damaged section of vinyl floor you will hire a specialist to repair/replace a section of real hardwood flooring.
4. CapEx is again likely to be similar between properties for many aspects. The roof wears out at the same rate in a poor neighborhood as a wealthy one.
However! On a higher class home, there may be some MORE expensive CapEx items to budget for versus the typical B/C class home. The high class home might have central air, a super high efficiency furnace, high end appliances, triple pane windows that need to be of a certain type specified by the HOA. All of those things mean that the Cap Ex cost to replace those things will be grossly MORE for the high class home versus the low class. Add to that #3, where the labor costs are likely to be more.
5. Another reason that a rule of thumb % makes sense for these items is that you use this when you underwrite a deal before purchase. You have no history and not enough specifics to delve deeply to derive a dollar amount based on actuals.
6. Some experienced investors in cheaper markets believe that 5% each on CapEx and maintenance can be MORE than enough! It can be MORE than enough if you are local and hands-on or if you can at least manage the work closely. If you choose your finishes carefully and if you craft your management approach to mitigate issues.
You are correct in some instances, especially for out of area landlords who use a PM or who don't have the knowledge, experience, or ability to manage these issues well that it can very easily cost MORE.
That is why 5% is a reasonable "rule of thumb" because some landlords in a cheap market might bring these in at 3-4% while others might be 6-8% each.
>First, anything can be boiled down to a % of rent. You may adjust it higher or lower based on factors specific to your property, market, or approach but a % is fine to use.
I covered this. Choose a percent to match the dollar is not using straight percent. You are choosing this option typically due to limitations in the calculator. The correct maintenance/capex is derived by taking expected lifetime and expected cost to derives dollar amount.
For example my market has special low not water heaters that cost more than no box water heaters. A good price for a plumber is $1600 parts and material. If I use 10 years expected lifespan than the water heater monthly expense is 1600/10/12=$13.33/month. Any calculation that attempts to put this into a percentage of rent is simply more work.
>A more expensive higher class property likely has more expensive finishes meaning the same damage caused by a tenant in a higher class property costs more in materials to repair.I have class c- units and class a units. 1) the price difference on the higher quality finishes is not very significant and typically the higher quality finish out lasts the lower quality finishes. Hans Grohe vs dela, American standard, etc. the Hans grohe is better built. You can feel the difference in the weight of the valves. Tile roofs versus aspalt shingle or roll down, versus hot mop. I have never needed to replace a tile roofs versus and have a unit 60 years old. Asphalt shingle or roll down done right, I get ~25 years. Hot mop is a dozen or so years. Same thing for flooring. Carpet has shortest life span, LVF is long. Good thick wood is longer, tile on cement foundation is the longest (we do not do tile in large space on anything other than cement foundation). By the way the example I used were real examples from my portfolio. They were not made up. The little beach unit has gone full cycle on everything but framing (meaning everything has been replaced during our ownership, some big items twice (kitchen, bathroom, roof).
>The high class home might have central air, a super high efficiency furnace, high end appliances, triple pane windows that need to be of a certain type specified by the HOA.
I would think it is a rare market that AC is expected in class a but not class c. I typically find high efficiency HVAC have longer lifespan and have only one unit that has high efficiency HVAC. Mini split are typically high efficiency and I have them in my class c- units. Even my class a I attempt to get ge profile. Sure some tenants may prefer Viking, etc but I have not found it to cause me any issues getting market rent. In my relatively mild San Diego market, inland units in class c have AC. If it is not hvac then mini split or multiple window units. I have only a few units without whole house AC and only one without whole house AC (HVAC or mini split) that has ever had a change of tenant.
>Some experienced investors in cheaper markets believe that 5% each on CapEx and maintenance can be MORE than enough! It can be MORE than enough if you are local and hands-on or if you can at least manage the work closely. If you choose your finishes carefully and if you craft your management approach to mitigate issues.
I agree with the sentiment of local hands on can reduce their costs significantly. However, the max savings is achieved by doing the work themselves. I admit to doing a lot of this when starting. I will also say I occasionally still do this mostly to mentor others. But recognize that when you do the work yourself, you are in effect taking on a job at that contractor’s rate of pay. I do not invest in RE to make contractor rate of pay (even though some contractors make good money, they do not make close to what I expect to earn from my RE investments). In addition, trying to do all work yourself will hinder scaling and can lead to burnout.I saw a post on BP in the last week of a quad with $700/month rent on each unit. 5% maintenance, 5% cap ex is a total of 10% or $70/month. This is far too low for sustained cost even if you could do all labor yourself. I think it is at least a factor of 2 low if you did all work yourself. Likely a factor of ~4 too low if hiring the work out. I do recognize $700/month is an extreme low rent, but it does show 5% maintenance, 5% cap ex cannot work at extreme low rent points.
Again I agree with the belief active, hands on maintenance/cap can significantly reduce maintenance/cap ex costs. Similarly it can save PM costs self managing. We self manage our LTRS, but in my underwriting I allocate for a PM because we do not work for free. Also some self managers do not keep rents were they should be, know the various laws, etc. I had a post yesterday that the poster was unaware of a California law that protects against bogus ESAs. weekend self managers could result in lost profit. I believe if you are doing repairs yourself, unless you want to work for free, you should allocate for the maintenance/cap ex costs of the work done by the opertator. Furthermore, the operator has to be sure they can perform the work correctly. Incorrectly done repairs can result in additional costs.
good luck
- 7moDrew SygitBusiness MemberProperty Manager · Royal Oak, MI · Member since 2012 · 12k+ posts · 9k+ votes
Quote from @Laura Glasscock:
Help please - new to running the calculators. How do you know what % to enter for vacancy rate and maintenance? I don't think we'll have any vacancy (so much interest already and I have a tenant). We are BRRRR-ing so should be very little maintenance after completed. Would appreciate some guidance...thx!!
Vacancy, or Days On Market (DOM), depends on several metrics:
1) Current market conditions: vacancy will fluctuate with the economy
2) Market subsegments: often rent amount affects DOM
3) Seasonality: Nov-Feb is the worse-time of year for DOM
4) Property Challeges: not all properties are really the same. Pass-thru bedrooms are usually a negative.
One thing that investors NEVER put in their calculations - tenant nonperformance.
Most lenders do it - credit card companies, auto lenders, even mortgage lenders.So, why isn't it done for rentals?
Check out this chart:
FICO Score
Pct of Population
Default Probability
800 or more
13.00%
1.00%
750-799
27.00%
1.00%
700-749
18.00%
4.40%
650-699
15.00%
8.90%
600-649
12.00%
15.80%
550-599
8.00%
22.50%
500-549
5.00%
28.40%
Less than 499
2.00%
41.00%
The property location and local tenant pool can be used to model the likelihood that a tenant will not perform the duration of a 12-month lease.
Logical Property Management4.9459 Reviews - Lender · Marlboro, NJ · Member since 2025 · 243 posts · 150 votes7mo
From a lender standpoint, we almost always assume some level of vacancy, even if the property is fully leased or has strong demand.
5% is a pretty common baseline assumption. It’s not necessarily saying you’ll experience 5% vacancy every year, it’s just a buffer for turnover, non-payment, or timing gaps.
Same idea with maintenance. Even after a BRRRR rehab, I'd still underwrite something conservative. New renovations reduce near-term surprises, but they don't eliminate them.
When you’re running your own numbers, it’s less about predicting perfection and more about building margin into the deal. If it still works with conservative assumptions, you’re in a much stronger position.
- Rental Property Investor · Tustin, CA · Member since 2019 · 63 posts · 29 votes7mo
I use 5% vacancy and 35% for expenses to ensure all areas are covered. You never want to assume a property will make a certain amount when there's always a chance things could go wrong. Cheers.
- Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes7mo
@Dan H., I'm sorry but calculating the cap ex cost of a hot water heater as you do is not useful at all.
1. Your $1600 cost isn't what anyone should pay for parts/material as with labor that would be over $2k almost double the average cost. ]
2. Costs go UP over time! The cost you are budgeting for today will be MORE when the unit actually requires replacement.
3. The 10 year lifespan is grossly off base unless you are buying the cheapest garbage 6 year warrantied unit. A reasonable rule of thumb would be for the unit to last almost double the warrantied period. In my own home the water heater is 22 years old.
4. A mom & pop landlord cannot get accurate numbers for replacing every aspect of their home nor is it worth their time to try to. How much to replace the entire electrical system? How much will it cost in 35 years when it needs to be done?
5. If someone managed a LARGE number of units, they might do calculations as you suggest for the MOST COMMON Cap ex replacement items and use those numbers as some kind of guide. That is NOT how most smaller landlords could or should try to operate. Way too much analysis for too little benefit.
- 7moDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes>Your $1600 cost isn't what anyone should pay for parts/material as with labor that would be over $2k almost double the average cost. ]
Quote from @Kevin Sobilo:
@Dan H., I'm sorry but calculating the cap ex cost of a hot water heater as you do is not useful at all.
1. Your $1600 cost isn't what anyone should pay for parts/material as with labor that would be over $2k almost double the average cost. ]
2. Costs go UP over time! The cost you are budgeting for today will be MORE when the unit actually requires replacement.
3. The 10 year lifespan is grossly off base unless you are buying the cheapest garbage 6 year warrantied unit. A reasonable rule of thumb would be for the unit to last almost double the warrantied period. In my own home the water heater is 22 years old.
4. A mom & pop landlord cannot get accurate numbers for replacing every aspect of their home nor is it worth their time to try to. How much to replace the entire electrical system? How much will it cost in 35 years when it needs to be done?
5. If someone managed a LARGE number of units, they might do calculations as you suggest for the MOST COMMON Cap ex replacement items and use those numbers as some kind of guide. That is NOT how most smaller landlords could or should try to operate. Way too much analysis for too little benefit
Sorry I meant parts and labor. Thatis the lower end of licensed plumber water heater install in my market. As indicated our low NOX water heaters are more expensive so I suspect our material is a few hundred more than most markets. The math is correct from there. 1600/10/12=13.33/month. I used to have a spread sheet calculation maintenance/cap ex on most units. I have not done one in my local market in many years as I can ball park fairly accurately in my market. But I have done one on a luxury Sierra cabin and an Emerald coast condo in the last couple of years. On the luxury cabin, I had the top co-host in the market look at it for input. In the emerald coast condo I had my RE agent look at it. The cabin came out to $600/month. The emerald coast condo was over $300/month. Both of these were using local labor.
>Costs go UP over time! The cost you are budgeting for today will be MORE when the unit actually requires replacement.
true. My underwriting has an expense increase annually. Some years will be above my estimate and some years below but because I use noticeably above fed target cpi I should be fine in the long run. I took this as obvious. If I have $400/month maintenance and cap ex and use 3% inflation on those areas, my underwriting will show at $412/month in year 2. I hope everyone understands that maintenance/cap ex increases with time and in markets with $700/month rent, the rent growth has not historically kept up with the inflation. If they do not know it, they should after reading this.
>The 10 year lifespan is grossly off base unless you are buying the cheapest garbage 6 year warrantied unit. A reasonable rule of thumb would be for the unit to last almost double the warrantied period. In my own home the water heater is 22 years old.
I have had a water heater last about the same length as your 22 years. In the last 5 years I have had 8 water heaters need repair/service under warranty (all but one were Rheem so i am no longer using Rheem). They will cover the parts but not the labor unless the problem happens almost immediately. On average i get no where near double the warrant but likely a little longer than 10 years I used in the calculation. I want my underwriting to be conservative. Use whatever lifetime you want, but until you do the exercise I claim you have little idea of the sustained maintenance/cap ex cost (exception for a full life cycle property where virtually all cap ex has been completed once under ownership).
>A mom & pop landlord cannot get accurate numbers for replacing every aspect of their home nor is it worth their time to try to. How much to replace the entire electrical system? How much will it cost in 35 years when it needs to be done?
my last full electrical replacement (2/2) was $8k done mid 2024. If I use 3% inflation on it at 1.5 years is $360 additional. That was also when I did my last full plumbing replacement. If you want to know the real sustained maintenance/cap ex is there any other way that provides even fairly accurate numbers? Note a good experienced mentor familiar with the market likely has an accurate number even if it is derived from someone else’s accurate number. What I consistently see in the underwriting I analyze is the more experience the investor has, the more they allocate to expenses. Not just maintenance/cap ex but you may see bookkeeping expense, asset protection expense, accounting/financial advisor/tax man expense, miscellaneous expense, pm expense even if self managing. Their underwriting is typically more thorough and I doubt they are spending more time on the underwriting. They already know these numbers. They have the process down. I will underwrite 2 properties today. I hope neither take longer than it took me to compose this post.>if someone managed a LARGE number of units, they might do calculations as you suggest for the MOST COMMON Cap ex replacement items and use those numbers as some kind of guide. That is NOT how most smaller landlords could or should try to operate. Way too much analysis for too little benefit
I am good with numbers so I do not find it that hard. There is an accountability group that my wife belongs to that refers to me as the cfo. I look at a fair amount of numbers for others. Note I no longer do these in my own market because I have some idea of what the numbers would show. I suspect most large operators no longer have to do these calculations. If they are large enough, the published NAR apartment numbers may be accurate. Note these numbers are unattainable for small operators. I question if you never did one of these cost/lifespan analysis, how are you estimating maintenance/cap ex? I know from the underwritings I evaluate that the most common I see is to use the calculator's default percentage. It is way off on the underwriting I am asked to evaluate. The underwriting I see with fairly accurate maintenance/cap ex have mostly either done a cost/life span analysis, leveraged a mentor or somebody's else's cost/lifespan analysis, or have a lot of LL experience.
I question how you have derived your maintenanc/cap ex? I will say with experience most people increase the expense numbers and can get fairly close. But I have a property that has $60/month tree bush trimming costs. It took me my second time getting over $5k expense before I recognized the impact of the trees. Pools are also crazy. Chlorinators have crazy short lifespans. Chemicals, water, pumps, etc. even a heavy use spa is expensive to maintain and operate (ours at the STRs gets used daily by slightly large groups).good luck
- Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes7mo
@Dan H., a few more comments:
1. Every time you delve deeply into an item to calculate its cost exactly you will tend to introduce additional error!
If a newbie landlord reads your response they might say to themselves well my market is a little cheaper, I will use $1400 for my water heater number. The issue is that maybe 40% over the actual cost. They then know they replaces the roof for $12k last year and use your number of 25 years for an asphalt roof and a warrantied architectural shingle is warrantied for 25 years but likely will last 35+ with some minor repairs before replacement in my market's weather. Again introducing error. These errors add up!
2. Where does money come when a tenant leaves damage that cannot be recouped from the deposit? It comes from the maintenance/repair budget. A mom & pop landlord might be more likely to incur this kind of issue. Will they incur a small amount of damage or several thousand?!? Which do they budget for when analyzing deeply?!?
3. The kind of analysis you are talking about would make every potential deal look BAD because of the gross overestimation.
4. A typical landlord is going to use a rule of thumb % to start with.
5. They will set up not only an account to store these reserve funds but also plan for peaks and valleys. For example: what if they incur a large expense early on before reserve funds have accumulated?!? Maybe they have a LOC they can draw upon.
6. So, the landlord will ACTIVELY manage things. They will look forward to see what Cap Ex items are likely on the horizon. They will see a roof replacement a few years before it needs to be done and plan accordingly. If they need to adjust the % up a little they will proactively before the money is needed.
7. There are many Cap Ex issues that you cannot reasonably estimate. You might have an oil fired boiler today but in 25 years when it needs to be replaced those may not even be legal in your market. To electrify the heat you might need to upgrade the whole service! The average landlord cannot analyze those things accurately enough to generate a useful number looking that far in the future.
8. You know more about NOW and the near term future! A landlord CAN look at what is happening now and look at what is likely to be needed over the near future to evaluate how to manage things. They can look at a roof and know they have had minor repairs done the twice in the last 3 years and the roof is 32 years old and near replacement age. Then they can plan and budget for exactly when the replacement will occur a few years out.
- 7moDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Quote from @Kevin Sobilo:
@Dan H., a few more comments:
1. Every time you delve deeply into an item to calculate its cost exactly you will tend to introduce additional error!
If a newbie landlord reads your response they might say to themselves well my market is a little cheaper, I will use $1400 for my water heater number. The issue is that maybe 40% over the actual cost. They then know they replaces the roof for $12k last year and use your number of 25 years for an asphalt roof and a warrantied architectural shingle is warrantied for 25 years but likely will last 35+ with some minor repairs before replacement in my market's weather. Again introducing error. These errors add up!
2. Where does money come when a tenant leaves damage that cannot be recouped from the deposit? It comes from the maintenance/repair budget. A mom & pop landlord might be more likely to incur this kind of issue. Will they incur a small amount of damage or several thousand?!? Which do they budget for when analyzing deeply?!?
3. The kind of analysis you are talking about would make every potential deal look BAD because of the gross overestimation.
4. A typical landlord is going to use a rule of thumb % to start with.
5. They will set up not only an account to store these reserve funds but also plan for peaks and valleys. For example: what if they incur a large expense early on before reserve funds have accumulated?!? Maybe they have a LOC they can draw upon.
6. So, the landlord will ACTIVELY manage things. They will look forward to see what Cap Ex items are likely on the horizon. They will see a roof replacement a few years before it needs to be done and plan accordingly. If they need to adjust the % up a little they will proactively before the money is needed.
7. There are many Cap Ex issues that you cannot reasonably estimate. You might have an oil fired boiler today but in 25 years when it needs to be replaced those may not even be legal in your market. To electrify the heat you might need to upgrade the whole service! The average landlord cannot analyze those things accurately enough to generate a useful number looking that far in the future.
8. You know more about NOW and the near term future! A landlord CAN look at what is happening now and look at what is likely to be needed over the near future to evaluate how to manage things. They can look at a roof and know they have had minor repairs done the twice in the last 3 years and the roof is 32 years old and near replacement age. Then they can plan and budget for exactly when the replacement will occur a few years out.
>I will use $1400 for my water heater number. The issue is that maybe 40% over the actual cost.
You are saying you can get a licensed plumber to install a water heater at $840 parts and labor? When was the last time you had a licensed plumber install a water heater. In addition, I would have subtracted off more than $200 for our low nox as I indicated a few hundred more (I used to know how much more they cost but have forgotten that info).
>I have replaced 6 aspalt roofs (3 shingle,3 Roll ons) in the last few years. One (asphalt shingle) was near your 35 years old, 2 (one asphalt shingle and one roll on) were at 25 years old. Three I am not exactly sure of their age but believe to be much closer to 25 years than 35 years old. Note this is in mild San Diego.
You are missing my point as I do not care what life span you choose or what cost you use, the exercise will be enlightening and indicate to a mass majority that they are under allocating maintenance/cap ex. The exercise is where the value is. The exercise will provide a more accurate estimate than anything other than potentially a full life cycle of all cap ex (this is not feasible for virtually anyone).
>The kind of analysis you are talking about would make every potential deal look BAD because of the gross overestimation.
Is that really the reason or is it more likely when properly allocating for sustained maintenance/cap ex most/virtually all LTR hold deals today are bad? especially choosing the conservative numbers you believe in. If you believe the average asphalt roof is going to last 35 years then maybe use 35 or 32 (to ahieve a conservative estimate) years. It is my belief that what ever numbers you use will in a large percentage of the cases show an Under estimate of maintenance/cap ex costs.
There is a reason many syndicators have slowed or taken a break in the last few years. It is because good RE purchases are challenging to obtain.
Note I do not take on the effort and risk of active residential RE for return anywhere close to passive options. Sp500 has lifetime near 10%. No tenants, simple purchase, simple exit, low fees, no maintenance/cap ex, no mgmt, no bookkeeping, no asset protection costs, no impactful jurisdictional laws, etc. My LPs prior to 2022 returned in the 30s%/year (4 since then are more uncertain). what sort of return should be necessary for active residential RE? It is a personal choice, but I would not choose active residential RE at ROI of 20%/year, I require a higher rate of return.
> typical landlord is going to use a rule of thumb % to start with.
I agree this is what virtually every new RE investor does. And if they obtained this percentage by discussing it with a local RE investor with a lot of experience then I would have less concern. But what I see most often is 5% allocated to each of vacancy, maintenance, cap ex. Vacancy rates in an area can be obtained in a couple minutes. But obtaining legit maintenance/cap ex for an area is less trivial. Go to Re Meet ups and talking to the right people can obtain a decent number.
I can typically tell the experience of the underwriter by their underwriting. The more experience the more things they include in the under writing. There is a local investor on BP that includes rent/eviction moratorium risk in his underwriting. This would be location specific. Los Angeles has been largely on a rent increase moratorium since COVID. There was the COVID moratorium, about a year where rents could be raised per rent control laws, then the fires rent increase moratorium which I believe is still in effect. I would suggest rent increase moratorium should be in any Los Angeles underwriting. One rent controlled rent increase in 5 years is a real risk in that market. Note P&i is probably fixed but other expenses are not. The cash flow has likely decreased since the start of COVID in LA.
>They will set up not only an account to store these reserve funds but also plan for peaks and valleys. For example: what if they incur a large expense early on before reserve funds have accumulated?!? Maybe they have a LOC they can draw upon.I view how to allocate for maintenance/cap ex related to, but different, than how you keep the reserves. I have no real liquid reserves but I have credit cards that can cover everything. 6 times I have had units virtual destroyed (all but red tagged). One duplex in golf shores twice (in consecutive years, we had just finished the rebuild when destroyed again) and a local duplex due to fire. Only the local duplex had rent coverage, the golf shores were STRs. There are literally infinite ways to be able to obtain the more extreme costs when necessary or cover ~12 months (twice) with no rent income.
>So, the landlord will ACTIVELY manage things. They will look forward to see what Cap Ex items are likely on the horizon. They will see a roof replacement a few years before it needs to be done and plan accordingly. If they need to adjust the % up a little they will proactively before the money is needed.
Again this seems more about reserves than the actual maintenance/cap ex projection that is used in all other financial projections (ROI, COC, etc) and the purchase decission. The projections I am discussing are projections most valuable at time of purchase, but also play an ongoing role. It is important at purchase to have an educated estimate of the maintenance/cap ex (I do not consider picking 5% because it is the calculator's default to be an educated estimate or any other arbitrarily selected percentage) as they comprise part of the projected expenses that is critical in determining the projected return and if that projected return warrants the risk/effort of active residential RE.
>There are many Cap Ex issues that you cannot reasonably estimate. You might have an oil fired boiler today but in 25 years when it needs to be replaced those may not even be legal in your market. To electrify the heat you might need to upgrade the whole service! The average landlord cannot analyze those things accurately enough to generate a useful number looking that far in the future.
These are rare. But if you allocate life span and replacement cost today with the inflation factor for 25 years, you may be off or accurate. Regardless you performed your thorough estimate rather than choose an arbitrary percentage that often is the calculator’s default. In addition, you are no worse than having a percentage that also could not foresee the future.
I think you are more discussing issues/challenges of reserves while I am discussing accurate and thorough underwriting. I am less concerned about the source of reserves, but agree new investors do need to consider their source of reserves. I do not consider reserves at all in my purchases at this point.Good luck
- Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes7mo
1. Mr Math, you showed how easy it is to be WAY off when doing these things!
When I said $1400 is 40% more than the cost that means $1,000 because 40% more than $1000 is $1400! You tried to subtract 40% of $1400, which is DIFFERENT because the basis is different than I stated.
And yes, it is possible to get a hot water heater installed for $1,000 possibly less if you use a handyman instead of a plumber.
2. You just contradicted yourself. You don't care the lifespan chosen and it will give a more accurate estimate. Those things are non-sequiturs.
3. A landlord does not need to try to estimate as you suggest to MANAGE things. They can focus on MANAGING and make all that error prone analysis obsolete!
4. Vacancy rates cannot be obtained ANYWHERE! Your vacancy may be higher or lower than average based on your approach to MANAGING! So, using someone else's number believing you can OBTAIN a vacancy rate is a little filly.
5. Using 5% each is a good rule of thumb because a landlord can reasonably manage those numbers to come in LOWER! I estimate 5% for each going in but only really need 12-13% in reality.
If I analyzed as you do, I would likely come up with needing 20%+ which would be a pointless waste of effort and waste of money sitting to do nothing.
6. You don't need to waste time analyzing things that are always going to be inaccurate to make yourself feel better. You can manage things as you go, assess your current situation and the near future and manage accordingly with MUCH better knowledge.
- 7moDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Quote from @Kevin Sobilo:
1. Mr Math, you showed how easy it is to be WAY off when doing these things!
When I said $1400 is 40% more than the cost that means $1,000 because 40% more than $1000 is $1400! You tried to subtract 40% of $1400, which is DIFFERENT because the basis is different than I stated.
And yes, it is possible to get a hot water heater installed for $1,000 possibly less if you use a handyman instead of a plumber.
2. You just contradicted yourself. You don't care the lifespan chosen and it will give a more accurate estimate. Those things are non-sequiturs.
3. A landlord does not need to try to estimate as you suggest to MANAGE things. They can focus on MANAGING and make all that error prone analysis obsolete!
4. Vacancy rates cannot be obtained ANYWHERE! Your vacancy may be higher or lower than average based on your approach to MANAGING! So, using someone else's number believing you can OBTAIN a vacancy rate is a little filly.
5. Using 5% each is a good rule of thumb because a landlord can reasonably manage those numbers to come in LOWER! I estimate 5% for each going in but only really need 12-13% in reality.
If I analyzed as you do, I would likely come up with needing 20%+ which would be a pointless waste of effort and waste of money sitting to do nothing.
6. You don't need to waste time analyzing things that are always going to be inaccurate to make yourself feel better. You can manage things as you go, assess your current situation and the near future and manage accordingly with MUCH better knowledge.
Good catch on the math. I am surprised you can get a plumber to install parts and labor $1k.>You just contradicted yourself. You don't care the lifespan chosen and it will give a more accurate estimate. Those things are non-sequiturs.
I do not consider it a contradiction as use what is correct for your situation. If water heaters are $1k and last 15 years use that. What I desire and am consistent with that you need to get a more accurate number than using an arbitrary percentage which is very common. I even an ok if you get a percentage from a very experienced local LL who is aware of your rent and the critical items related to maintenance/cap ex. My point is most people use an indefensible approach that typically far underestimates the maintenance/cap ex. The market for years has been very forgiving exceeding most investor’s appreciation and rent growth projections. The last couple/few years have been much more challenging. In coastal So Cal and San Francisco area I used to virtually never see a post about a struggling investor. This is because even poor purchases with poor, or no, underwriting the performance was good. In the last week of so I have seen 3 posts of struggling investors in these markets. Usually I did not see 3 of these posts in those locations in 5 years. My point is now is not the time for inaccurate underwriting. Pulling a maintenance/cap ex out of the air is creating risks of underperformance.
>A landlord does not need to try to estimate as you suggest to MANAGE things. They can focus on MANAGING and make all that error prone analysis obsolete!
I think we continue to refer to different items. I am referring to underwriting on expected return projections such as the author is requesting in the vacancy rate This is also critical in knowing the expected cash flow. Many investors require the property to support itself. If they have poor underwriting, they may over project the cash flow and may need to support the property every month.
>Using 5% each is a good rule of thumb because a landlord can reasonably manage those numbers to come in LOWER! I estimate 5% for each going in but only really need 12-13% in reality.
using 5% in general is terrible. This does not necessarily mean for you using 5% is terrible. it could be ok with high enough rents. For a huge percentage of properties, and I suspect for yours, it is too low to cover sustained maintenance/cap ex. Question how many kitchens have you replaced? How many times have you replaced the plumbing? Hominy times have you replaced windows? All of these have long lifespans but they do have lifespans. Sustained expense estimates should be allocating for these expenses.
>I would likely come up with needing 20%+ which would be a pointless waste of effort and waste of money sitting to do nothing.
Again you are confusing determining cash flow projections with reserves. They are related but not the same. I personally am unconcerned about my reserves, but recognize newbies need access to reserves. However if maintenance/cap ex total is 20% of rent does not imply they need 20% of annual rent as reserves.
>You don't need to waste time analyzing things that are always going to be inaccurate to make yourself feel better. You can manage things as you go, assess your current situation and the near future and manage accordingly with MUCH better knowledge.
This does not work for underwriting at purchase which is what the OP is asking about. In addition, the long lifespan of the large expense items will likely have actuals under sustained costs for decades.
Note I am not stating it will be perfectly accurate using lifespan and current costs and applying an inflation adjuster, but it is likely to be more accurate than an arbitrary percentage which seems to be what you are advocating. I advocate accurate and conservative underwriting. To have accurate underwriting requires an accurate projection of maintenance/cap ex costs. Choosing any arbitrary percentage for maintenance/cap ex does not meet my definition of accurate projection. It is an indefensible approach. It can lead to poor RE acquisitions. 5% works on such a small percentage of properties that it is foolish to use that as an arbitrary default percentage. If investors want to choose an arbitrary percentage, they would be better served using 10% each. It may be a bit conservative on most properties which is better in underwriting than being aggressive.
Good luck
- Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes7mo
1. I do BRRRR, so I typically am replacing kitchens right before a unit goes into service.
2. Everything has a lifespan. If you look at something like rough plumbing or electrical the stated lifespan is going to be something like 40 years BUT nobody is replacing these at 40. They might not replace them until 60-80 years! Again too large a variation in estimating to be useful.
3. Using 5% is fine! It isn't any less accurate than your way of estimating. The difference is that the person using 5% doesn't have the false sense of security that your approach is giving you.
The person using 5% to underwrite might adjust it up a little if the place has deferred maintenance or has systems nearer to end of life than average.
After that they will monitor, manage, and adjust!
When you estimate 5% doesn't mean you have to stick with 5% all the way along. Someone managing their property actively can make decisions to keep the money in line to an extent. That might be changing the scope of work for example different finishes or managing someone less skilled more closely to save money over hiring someone more qualified.
You could hire a good handyman to replace the water heater for $900 rather than your regular plumber at $1100 or DIY it for even less.
4. What you keep failing to understand is that your approach isn't generating any kind of accurate number to use for underwriting. The whole methodology is a WAG.
A rule of thumb will get you in the neighborhood and you can manage from there
5. Almost no mom & pop landlords would go through what you suggest which makes it not useful at all since that is who is mainly here asking questions anyways.
- 7moDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes>Using 5% is fine! It isn't any less accurate than your way of estimating. The difference is that the person using 5% doesn't have the false sense of security that your approach is giving you.
Quote from @Kevin Sobilo:
1. I do BRRRR, so I typically am replacing kitchens right before a unit goes into service.
2. Everything has a lifespan. If you look at something like rough plumbing or electrical the stated lifespan is going to be something like 40 years BUT nobody is replacing these at 40. They might not replace them until 60-80 years! Again too large a variation in estimating to be useful.
3. Using 5% is fine! It isn't any less accurate than your way of estimating. The difference is that the person using 5% doesn't have the false sense of security that your approach is giving you.
The person using 5% to underwrite might adjust it up a little if the place has deferred maintenance or has systems nearer to end of life than average.
After that they will monitor, manage, and adjust!
When you estimate 5% doesn't mean you have to stick with 5% all the way along. Someone managing their property actively can make decisions to keep the money in line to an extent. That might be changing the scope of work for example different finishes or managing someone less skilled more closely to save money over hiring someone more qualified.
You could hire a good handyman to replace the water heater for $900 rather than your regular plumber at $1100 or DIY it for even less.
4. What you keep failing to understand is that your approach isn't generating any kind of accurate number to use for underwriting. The whole methodology is a WAG.
A rule of thumb will get you in the neighborhood and you can manage from there
5. Almost no mom & pop landlords would go through what you suggest which makes it not useful at all since that is who is mainly here asking questions anyways.
how would you know if you have never done anything to calculate it? In most/virtually all markets you are too low. I have done many of these in my market but none recently. I have done one of a luxury sierra cabin and one of a condo in emerald coast fairly recently. in both cases I sought a local expert’s input on my costs and lifespans. The luxury cabin projected $600/month maintenance/cap ex. Both cases 5% of LTR rent was way short and the condo had no exterior items. In addition I have seen a handful of others who have calculated the maintenance/cap ex cost and I suspect none of these were as low as 5% of LTR rents.
you are going in arbitrarily picking a percentage and stating it is as accurate as my calculated numbers that use a best estimate of price and lifespan. That is akin to having no process but claiming your process is superior.
as for the lifespan of plumbing, is matters less whether you use 40 or 80 years (I use 50 years and have had to replace drain pipes at 3 units in the last couple of years that were likely near 50 years old) than that it attempts to allocate some allocation and calculate a number.
i find it strange that you are advocating for an arbitrary number over a calculated estimate. I question if you just like to argue. I try to educate newbies to minimize their mistakes. I want them to do accurate and conservative underwriting and arbitrarily picking a percentage to use does not meet my criteria.
>What you keep failing to understand is that your approach isn't generating any kind of accurate number to use for underwriting. The whole methodology is a WAG.
Whether my number is accurate or not, it is not a wag. Choosing an arbitrary percentage is virtually the definition of a WAG.
>Almost no mom & pop landlords would go through what you suggest which makes it not useful at all since that is who is mainly here asking questions anyways.
unfortunately it is correct from what I see that most newer investors do not exert this effort or any effort to derive the number. A very large percentage of newish RE investors use the default percentage in whatever calculator that they are using. Then I see posts about inaccurate cash flow projections, unexpected expenses, etc. I am not sure what they expected when they used an arbitrary percentage of LTR for their maintenance/cap ex estimate. A lot of things go into the maintenance/cap ex including the class of tenant. Note tenant class and associated rent is inversely proportional to the maintenance/cap ex costs. Using a percentage is full of gotchas unless the percentage is specific to the market, tenant class, property features.I think we will never agree on this but I find it strange anyone can advocate for an arbitrary 5% be used. I will likely not respond further on this subject in this thread. I hope new RE investors see the risk of using an arbitrary percentage of the rent in estimating their maintenance/cap ex.
Good luck allocating 5% of LTR rent each for maintenance and cap ex.
- Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes7mo
1. First off, its a RULE OF THUMB! I said in a couple of responses you can adjust it a little depending on factors you know. I also said that a high end rental might cost more to maintain.
So, it stands to reason based on my responses that someone underwriting might choose to up their maintenance number to 6-8% for example!
2. You are comparing the rule of thumb % to your estimate! That is NOT a measure of accuracy AT ALL! As I have said, I am certain that your method will not yield an accurate or useful result. You would need to see if budgeting that % was meeting the needs over a period of time.
3. The rule of thumb gets you in the neighborhood only and thats all that you need to start. You can refine that number as you manage the property.
I am managing properties and allocating LESS than 15% total for those 3 items and have more than enough because of how I manage and because I do some things hands-on (LIKE MANY MOM & POP LANDLORDS!)
4. Have you ever looked at your property insurance??? They ESTIMATE the value of the property, they do what you are doing basically and estimate the "REPLACEMENT VALUE".
If I spent $200k building a home today the insurance company would likely want to say my "Replacement Value Estimate" is $300k. That is GROSSLY more than I would actually spend rebuilding the house.
5. The actual % needed is not going to vary THAT much. Nobody is doing maintenance for 1% and nobody should be spending over 10%. So, if the rule of thumb is 5% and people adjust mildly for obvious differences from the norm they are close enough to be useful and to start their management of the property.
6. Thank you for the good luck. As I said, I am able to allocate a little LESS than 5% for each of those items because experience has allowed me to adjust those down over time from the general rule of thumb. That is called MANAGEMENT!
- 7moDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes>You are comparing the rule of thumb % to your estimate! That is NOT a measure of accuracy AT ALL! As I have said, I am certain that your method will not yield an accurate or useful result. You would need to see if budgeting that % was meeting the needs over a period of time.
Quote from @Kevin Sobilo:
1. First off, its a RULE OF THUMB! I said in a couple of responses you can adjust it a little depending on factors you know. I also said that a high end rental might cost more to maintain.
So, it stands to reason based on my responses that someone underwriting might choose to up their maintenance number to 6-8% for example!
2. You are comparing the rule of thumb % to your estimate! That is NOT a measure of accuracy AT ALL! As I have said, I am certain that your method will not yield an accurate or useful result. You would need to see if budgeting that % was meeting the needs over a period of time.
3. The rule of thumb gets you in the neighborhood only and thats all that you need to start. You can refine that number as you manage the property.
I am managing properties and allocating LESS than 15% total for those 3 items and have more than enough because of how I manage and because I do some things hands-on (LIKE MANY MOM & POP LANDLORDS!)
4. Have you ever looked at your property insurance??? They ESTIMATE the value of the property, they do what you are doing basically and estimate the "REPLACEMENT VALUE".
If I spent $200k building a home today the insurance company would likely want to say my "Replacement Value Estimate" is $300k. That is GROSSLY more than I would actually spend rebuilding the house.
5. The actual % needed is not going to vary THAT much. Nobody is doing maintenance for 1% and nobody should be spending over 10%. So, if the rule of thumb is 5% and people adjust mildly for obvious differences from the norm they are close enough to be useful and to start their management of the property.
6. Thank you for the good luck. As I said, I am able to allocate a little LESS than 5% for each of those items because experience has allowed me to adjust those down over time from the general rule of thumb. That is called MANAGEMENT!
my family and I have gone full cycle on a property and been doing this a long time and the numbers are accurate as you approach full cycle. To think twiddling with an arbitrary percent at random is more accurate is absurd.
>I am managing properties and allocating LESS than 15% total for those 3 items and have more than enough because of how I manage and because I do some things hands-on (LIKE MANY MOM & POP LANDLORDS!).How long have you been managing properties? How many units are you on your second kitchen replacement so the kitchen has gone full cycle? It takes many years to go full cycle. Until kitchens, bathrooms, windows, roof, and plumbing have been replaced you have not encountered full cap ex. I use the term sustained maintenance/cap ex for being able to absorb all replacement items. In is near certainty that you are short on the sustained maintenance/cap ex.
>I am able to allocate a little LESS than 5% for each of those items because experience has allowed me to adjust those down over time from the general rule of thumb. That is called MANAGEMENT!I have a different word. Carnegie Mellon did a lot of work on advantages of process. They have 5 levels from 1 to 5. Even if you have some level 5 capability, if you have not met the criteria for level 2, you are level 1. Level 1 is called chaotic. It includes using arbitrary numbers or numbers that are not justified via data. It also is indicative of no processes and it counts processes as not supported by data as no process.
I find value in the exercise. I have done the exercise in both new markets I have placed offers on in the past year or so. I have had local experts weigh in on my numbers and incorporated their feedback. See the difference?
I do believe if you did the exercise accurately, you would likely increase your allocation. As indicated 2010 to 2022 was a very forgiving time in RE investing. Rent growth and appreciation in most/virtually all markets exceeded underwriting expectations. If maintenance/cap ex was off, it typically did not matter. The margins were bigger, the growth greater than forecast. I do not see that in the current market. Margins are tight. Investors are buying properties with crazy underwriting. This includes incredibly optimistic maintenance/cap ex allocations often based on an arbitrary % of rent. There is often an inverse relationship between rental maintenance/cap ex. 2 exact same properties, one class D area, other class B area. Class d will rent for less and is likely to have higher maintenance/cap ex costs. Using a percentage when there is hardly any relationship between them is …. Chaotic. The following have high relationship then rent: tenant class, property size, attached versus detached, number of bathrooms, size of kitchen. Exterior siding, yard including if has pool/spa, and many more. Go ahead and keep using a percentage of rent. If you keep adjusting it based on experience you will get there. For the new re investor, it is risky to use an arbitrary percentage. Either do the lifespan/cost analysis or get a number from a long time, successful RE investor in your market. Please do not arbitrarily use 5%.
Best wishes
- Investor · Houston, TX · Member since 2022 · 126 posts · 122 votes7mo
5% vacancy. 10% maintenance
- 7moJohn MorganPro MemberRental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
I've never calculate a certain percent for cap ex, vacancy or random maintenance issues. For a new BRRRR it'll be a lot less. I just kept 5-10k in savings for my first 3 or 4 rentals. Once I hit 20 properties I made sure I could tap into 25k or more if I needed it. I did have some big cap ex things pop up when I had around 6 properties early on and got a line of credit at my bank for 25k. Then I paid it back asap with the rental cashflow. I don't like having a lot of money in savings earning only 2%. I'd rather put it to use and buy more and more rentals that'll generate a much greater return. So when I calculate numbers when buying a rental that I think has potential, I like to make $200-$300/month at first if nothing breaks. I know rent will go up over time so I'm ok breaking even for the first few years by the time I factor in vacancies or cap ex.
- 7moKenneth GarrettPro MemberInvestor · Florida Panhandle/Illinois · Member since 2016 · 4k+ posts · 3k+ votes
The percentage being applied for vacancy is typically 5%, but that means your vacancy is 18 days. That is pretty short, but in a good market that is pretty much the standard.
Maintenance cost is going to vary as well, but the standard number is 10% with some caveats. 10% of rent at $1000 = $100 a month. It depends on the condition of the home.
I generally BRRRR my projects so the maintenance is lower because I have already spent the money on the updates. Not saying you should not have a number, but 10% is very safe for a house in decent condition. If your buying a house that is 100 years old and has not been updated maintenance costs are going to be high. You should have access to some funds while you are building up your maintenance reserves. You could use 5% as a starting point. With my BRRRR projects I use 3%, but I always have a reserve. We never know how rough tenants will be. That money is intended as an insurance fund for the what if something happens and eventually it will.
One more thing don't confuse maintenance cost with CAPEX cost. CAPEX is for major items: roofs, furnaces, air conditioners, plumbing piping replacement, etc. Again 5%-10%.
These are all rules of thumb. You need to access your property and determine the best route. You can always forget the percentages and just access a number like $50, $75, $100 a month for any of these vacancy, maintenance and CAPEX numbers.
- 7moAdam BartomeoBusiness MemberReal Estate Broker · Cape Coral, FL · Member since 2015 · 2k+ posts · 1k+ votes
Whomever put 5% vacancy rate on this thread has no idea what it takes to procure a tenant and get them moved in. 10% minimum if you want to be realistic.
There are 52 weeks in a year * 5% = 2.6 weeks. THERE IS NO WAY!
* Inspection and repairs 1-3 weeks, this is with a crew on payroll.
* Photos, marketing, showings 1- 8 weeks depending on the market. Today's market, 4+ weeks.
* Tenant move-in 1 - 4 weeks.
At your VERY BEST 3 weeks but the probable number of weeks is 5+ weeks. 10%+ vacancy rate over a one-year time frame.
Bartomeo Property Management4.7150 Reviews - 7moAlan AsriantsBusiness MemberReal Estate Agent · Philadelphia, PA · Member since 2019 · 1k+ posts · 1k+ votes
There is no right or wrong answer here and really the best answer is - it depends on your market.
Typically I see most investors using 5% or 18 days vacant - which if properly marketed in my area is a very accurate estimate. At times even an over estimate. Also the season in which you rent it out can affect those rates. Around Holidays that can easily double as demand slows down.
Ultimately the % that you include for your calculations is market dependent and how risk averse you are.
I see both sides of the spectrum - Those who don't discount the rent at all and just look at GROSS cash flows, and those that are extremely conservative and over estimate all the numbers.
For many long term plays, those that are overly conservative might find themselves in a position that they keep waiting for the perfect deal and end up pinching themselves because they "should've bought last year"
While those that are over ambitious might find themselves in tight positions trying to make a bad asset work well.
In many markets, discounting the rent discourages a lot of investors from buying solid assets. I once spoke to my neighbor who might've been an original owner of a duplex attached to mine. I asked him if he got a good deal - he told me: it wasn't great, but it wasn't bad.
Long story short - he's happy he bought it.
Alan Asriants - New Century Real Estate 590 Reviews - Accountant · Indianapolis, IN · Member since 2019 · 247 posts · 134 votes7mo
Really common question for people just getting started with the calculators. The most important thing to understand is that vacancy and maintenance are not just about what you expect to happen, they are about protecting yourself when things do not go as planned.
Even if you have a tenant ready to go, you should still use at least 5% for vacancy. Tenants move out, life happens, and you will have turnover eventually. Most experienced investors use 8 to 10% as a standard. On maintenance, a freshly rehabbed BRRRR is a great situation but 5 to 10% is still the right number to use because systems age, appliances break, and small things add up faster than you think. The calculators are not meant to reflect your best case scenario, they are meant to tell you if the deal still works when reality hits. If a property only looks good when vacancy and maintenance are zero, it is not a good deal, it is a hope.
- 7moAdrian Lammersdorf-SciollBusiness MemberRealtor · FL · Member since 2020 · 227 posts · 101 votes
Quote from @Laura Glasscock:
Help please - new to running the calculators. How do you know what % to enter for vacancy rate and maintenance? I don't think we'll have any vacancy (so much interest already and I have a tenant). We are BRRRR-ing so should be very little maintenance after completed. Would appreciate some guidance...thx!!
You can ask chat gpt what the vacancy rates are for your market and just account for 10% of the purchase price to that and repairs. If its an older home with higher vacancy rates id steer more towards 15%, if its in a better area and low vacancy then steer more towards 10%. That has worked very well for me over the past 3 years.
Thomas Lynne Realty527 Reviews- 7moDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Quote from @Adrian Lammersdorf-Scioll:
Quote from @Laura Glasscock:
Help please - new to running the calculators. How do you know what % to enter for vacancy rate and maintenance? I don't think we'll have any vacancy (so much interest already and I have a tenant). We are BRRRR-ing so should be very little maintenance after completed. Would appreciate some guidance...thx!!
You can ask chat gpt what the vacancy rates are for your market and just account for 10% of the purchase price to that and repairs. If its an older home with higher vacancy rates id steer more towards 15%, if its in a better area and low vacancy then steer more towards 10%. That has worked very well for me over the past 3 years.
If you have experienced 10% maintenance/cap ex in 3 years of ownership then you are way too low because none of the high cost items should have failed. Currently you are only addressing shorter lifespan, typically cheaper items. Even carpet lasts 3 years. Hopefully no slab leaks, hvac replacement, roof replacement, window replacement, foundation repairs, hardscape repairs/replacement, etc in the first 3 years.
How did you derive your 10% maintenance/cap ex (5% each) estimate when you did your initial underwriting?
10% total for maintenance/cap ex is too low for a mass majority of properties.
Good luck
- 7moTim JacobPro MemberReal Estate Agent · Baltimore, MD · Member since 2016 · 520 posts · 379 votes
Vacancy depends on the asset class. In A or B grade you should be able to fill them with less than 5% this assumes your not counting a leasing fee so if you delegate that I would add another 3-4%. In c grade add more. It will take longer to define people and more often then a or b grade they wont leave at the end of the lease in a convenient time for leasing leading to a little more vacancy. Also Imif you want to delegate property management understand the result wont be as good overtime the lower grade you go. Also rent hikes are more discouraged because of all of this. Lastly in c grade since you can't always get a slam dunk 700 plus credit score tenant things like evictions or vacancy to make sure you get the right person factor in. I see a lot of people on here brag about there ability to always pick the right people in c or d grade rentals on here. Then all of a sudden they dissappear from posting or they make 1 post about how they got the wrong people. You will have the same experience over time in the lower asset classes and I dont recommend just buying in red areas expecting state laws to save you. Things are getting progressively worse for landlords.
For maintenance it depends on the quality if renovation. I have seen people do multiple brrr properties and have a glorified painting contractor be the gc. Initially it was great for them because the gc was cheaper they didn't have to gc and they got a bigger initial payout because the places appraised well. Then the tenants moved in and started complaining about maintenance issues. All the mechanical stuff was the issue because a lot wasnt done right. I would tell you to leave atleast 10k for a house for repair budget. If things like the roof and hvac were replaced and hold up a couple years you should be in the clear for the next 10 plus years. In older buildings things like cast iron sewer, boiler conversion options, old windows, lead paint, etc should also be considered. Also in lower grade stuff tenant caused maintenance should factor in more. Things like deeper cleanings and a full house repaints between tenanancies are more common as are unpaid utilities.
In summary generic assumptions on vacancy and maintenance as well as property management and unreimbursed utilities should be assessed on a case by case basis with asset class being a large factor as well as quality of renovation in case of a new brrr. Hope this helps.
- 7moBo SmithPro MemberHinton, WV · Member since 2026 · 1k+ posts · 373 votes
Even great properties have turnover - I'd start with 5% vacancy, 8% maintenance as baseline, then adjust down for solid areas. BRRRR means lower maintenance short-term but still budget for surprises. What market are you analyzing?
- 7moBo SmithPro MemberHinton, WV · Member since 2026 · 1k+ posts · 373 votes
Even great properties have turnover - I'd start with 5% vacancy, 8% maintenance as baseline, then adjust down for solid areas. BRRRR means lower maintenance short-term but still budget for surprises. What market are you analyzing?
- 7moBen FernandezBusiness MemberRealtor · Lancaster, PA · Member since 2025 · 169 posts · 97 votes
5% is a standard for vacancy. I wish the department of numbers website was still active. That was a great reference to actual vacancy rates which usually span from 3% to 7%.
Maintanence should be very minimal post renovation. You can budget for 2%, but you should critique this based upon your expectations and what could technically cause reason for potential repair/replacement under a maintenance request category from the tenant.
I'll take it that you've already accounted for all the other expenses since you haven't inquired about - management fee, snow/lawn care, trash, water, sewer, turnover, common electric, CapEx, extermination, supplies, legal, salary, advertising, inspections, cleaning, reserves, accounting and (of course) taxes and insurance (as applicable).
- Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes7mo
Completely depends on the area. I mainly work north side Chicago here vacancy rates are sub 3% with virtually 0 evictions and you have a new tenant come same day an old tenant leaves. You go out in the suburbs though or to lower class sides of the city and the vacancy rate can go up to 5-15% really depends on the area.
- Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes7mo
Please, that is just silly. You don't have 100+ years of experience to claim you have gone "full cycle". The sewer line on your house would be a good example, where it might be expected to last 80 years but might actually last 160 years! I suspect you don't have 80-160 years of experience with any given property.
You may wish you believe you generate "good estimates" but by your description you don't have a methodology in place to do that. You WANT to believe that you do, but nothing you have said describes a process others can reliably use to generate a useful result.
You show your lack of understanding by suggesting to get a number from a long time successful RE investor in your market! That proves CLEARLY that you have no process since someone else's number is not very useful either. How someone manages can MORE effect on what you need to allocate than most anything else and you completely fail to understand that.
No RE investor will go "full cycle" on a property! None of us will live long enough to do that. Owning an investment is a "project" because it meets the technical definition of having a limited time, scope, and money. So using project management principles is much more productive for most investors especially since many of the principles are intuitive for the mom & pop landlord.
Your suggestions are not useful for the mom & pop landlord and perhaps not for anyone else either. So, I suggest ignoring them.
Enjoy your day!
- 7moDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Quote from @Kevin Sobilo:
Please, that is just silly. You don't have 100+ years of experience to claim you have gone "full cycle". The sewer line on your house would be a good example, where it might be expected to last 80 years but might actually last 160 years! I suspect you don't have 80-160 years of experience with any given property.
You may wish you believe you generate "good estimates" but by your description you don't have a methodology in place to do that. You WANT to believe that you do, but nothing you have said describes a process others can reliably use to generate a useful result.
You show your lack of understanding by suggesting to get a number from a long time successful RE investor in your market! That proves CLEARLY that you have no process since someone else's number is not very useful either. How someone manages can MORE effect on what you need to allocate than most anything else and you completely fail to understand that.
No RE investor will go "full cycle" on a property! None of us will live long enough to do that. Owning an investment is a "project" because it meets the technical definition of having a limited time, scope, and money. So using project management principles is much more productive for most investors especially since many of the principles are intuitive for the mom & pop landlord.
Your suggestions are not useful for the mom & pop landlord and perhaps not for anyone else either. So, I suggest ignoring them.
Enjoy your day!
>You don't have 100+ years of experience to claim you have gone "full cycle".
I have a property that we have replaced everything except hardscape and framing in our ownership. bathroom, kitchen, and roof twice. Electrical was not quite a full replacement the first time but last year I did full replacement including the stuff we did in 1999 (there was a reason we chose to re-do fairly recent electrical that was done in 1999). Name an item besides hardscape and framing. It has been replaced and most including roof, kitchen and bathroom twice. Home is on record as being built in 1901. A lot has changed since 1901. It is about as close to full cycle as you can get.>You WANT to believe that you do, but nothing you have said describes a process others can reliably use to generate a useful result.
I was not attempting to provide a SOP or WI, but I believe my example on the water heater was enough to get most investors started. Because I have only done a couple of these recently, we do not have a SOP for this and are not planning on creating one.
>show your lack of understanding by suggesting to get a number from a long time successful RE investor in your market! That proves CLEARLY that you have no process since someone else's number is not very useful either. How someone manages can MORE effect on what you need to allocate than most anything else and you completely fail to understand that.
The type of really experienced RE investor that I was referring to would take into account the experience of the investor including their likely processes, contacts, ability to be hands on versus hiring out all the work, etc. the goal is pretty low as the goal is a more accurate estimate than an arbitrarily chosen 5%. The type of experts I am referencing can certainly do better than the arbitrary 5% except for the rare case that 5% happens to be fairly accurate.
>No RE investor will go "full cycle" on a property!
I think it depends on if you consider every item replaced full cycle or having to do it twice full cycle. We have gone full cycle on a property if the definition is replacing virtually everything at least once. One full gut rehab that includes drywall, electrical, and plumbing could do it. My son recently placed offer on a condo that had a bad flood. His rehab was to include all but the rough plumbing (included the drywall, electrical and hvac due to water damage). Close to the one definition of full cycle (missing the plumbing) and he is 23 years old. Apparently you do not have to be that old.
Keep using your arbitrary 5%. As someone who has calculated the expected value in a few markets and can extrapolate those results to other markets, I can say that 5% is low in most
markets. I do think you would benefit from the exercise but doubt you will do it.
good luck
- Realtor · OH · Member since 2026 · 122 posts · 77 votes7mo
Laura — welcome to the BRRRR grind!
Even if you have a tenant lined up, it’s smart to assume some vacancy. For small multifamily or a single tenant, I usually budget 5–8% for vacancy — it accounts for lease turnover, late payments, or unexpected delays.
Maintenance is tricky. Even brand-new renovations need a buffer for things like minor plumbing, appliances, or wear-and-tear. For BRRRRs, I usually set aside 5–10% of gross rent per year, depending on property age and scope of rehab.
The idea isn’t that you expect problems — it’s to protect your cash flow so one surprise doesn’t derail the deal.
If your numbers still pencil with those buffers, you’re in good shape.
- Realtor · OH · Member since 2026 · 122 posts · 77 votes7mo
What type of property is this — single-family or small multifamily?
- 7moLindsay DavisBusiness MemberReal Estate Broker · Birmingham, AL · Member since 2019 · 326 posts · 203 votes
@Kevin Sobilo offers some good advice here. I’ll offer some additional pointers:
1. Your average vacancy may be 5%, but if you own one property, your vacancy will be lumpy. For example, if you buy a property in an oversupplied market without a tenant in place, you may face one or even two months of vacancy before you can get a tenant to move in. That’s 8% to 16% of gross potential rent gone. On the other hand, if you already have a tenant in place, you may face no vacancy losses for a couple of years.
2. I agree that budgeting 5% of rent for maintenance is a good ballpark. Another way to estimate repairs and maintenance is to base it off of your property value. 1% to 2% of the property’s value is a good ballpark. For example, if your property is worth $250,000, budget between $2,500 and $5,000 annually for repairs and maintenance costs.
3. Capex reserves should be budgeted separately for repairs and maintenance. Again, an alternative way to calculate capex would be to budget an additional 1% to 2% of the property value per year. $100 to $200 per month per door is another decent estimate. If you don't want to deal with capex right out of the gate, buying inventory from a reputable turnkey provider who will repair all capex items, or going for a new construction property, can help you minimize capex for the first few years of your holding period.
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