I'm looking at a multifamily building: about 100 years old, 6 units plus 2 long-term businesses, 4 of the units recently renovated, ~$700K to buy, $92K potential income. The proforma shows $1,200/yr maintenance (along with $2,400 for trash removal and $3,600 for water/sewer, so highly rounded $100/$200/$300-per-month numbers). The maintenance seems very low to me (although I don't think there is a lot of deferred maintenance.
I've done some research here (and elsewhere), and the recommendations for maintenance and capex vary greatly. I often see 10% as a rule of thumb for maintenance (sometimes 10%-15% or as high as 20%), which at 10% would be around $9,200/year. I also see $300-$600/yr/unit as rule of thumb for maintenance, which would work out to more like 5% here at most.
I also see $250-$450/yr/unit for capex.
The real estate agent thinks budgeting 10% for maintenance is way too high, thinking it should be around $4,000 (factoring in another $1,800 or so for reserve for replacement).
What typically works best, a percentage or cost per unit? Would $5,800/year be realistic to budget for an older property like this? Any thoughts?
I can't stand this term. If you only knew how many times it is overused........ : )
It's abused often to mean anything from replacing a light fixture, to carpet and paint, to a full blown reno where everything is replaced.
This is important especially on a 100 year old building. Always remember carpet and paint is cheap to make it look pretty but what can destroy you and your investment is what is under the sinks, under the foundation, behind the walls, up in the roof etc.
If none of that has been replaced on an old building then it would be prudent to use a very high number.
Has the agent ever owned a property like this?? If not they might just be saying that to get the sale to close and overcome an objection. If they are an investor themselves with a track record then they have actual knowledge to speak from instead of just a broker/agent perspective.
Hope it helps.
@Scott P. $5800 is too low IMHO.
i own a 110 yr old 6 unit edwardian building in SF ... bought it 10 years ago with everything refreshed (e.g., fully upgraded electrical, plumbing, reinforced foundation, new roof, new kitchens/bath, new paint, new everything, etc and all permits to prove the work. it was as new as you're going to get for a 100 yr old building and overall, we've had minimal maintenance issues and are accruing more for just cap ex then you're projecting for both maintenance and cap ex on a partially rehabbed building.
for perspective, we accrue $6100 annually for cap ex on top of all typical operating and maintenance expenses. we set our cap ex budget by getting quotes on roof replacement, exterior painting, etc factored in the life span + increases for inflation (e.g, we assume its going to cost more to repaint in 10 years then it is today, so we factor that inflation into our calc) to derive an annual accrual amount on cap ex. don't take the seller's or your agent's word on what you should be reserving...do your own homework and come up with a realistic figure.
i don't consider pro forma numbers unless they are higher then my estimates, which is rare ... and am cautious in using averages unless you are comparing identical properties in the same region.
Kevin Young, Central Pacific Communities, LLC | http://kevinpaulyoung.com
@Kevin Young explained it very well
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