What % of gross income for expenses?

4 Replies

Hi,

What % do you use as your "rule of thumb" for estimating annual operating expenses when evaluating an income property? Here in Tucson, AZ, most properties that I manage for clients are running between 20-28% expenses of gross rents (excluding Capex, and including management fees of 10%). so I (and my partners) run a 30% expense estimate when evaluating deals. However, I've seen a few people talk about a 50% rule. Does that 50% also include capital expenditures?

I'm essentially trying to see if there's a wide variance geographically, or if somehow we've gotten lucky. (FYI, we manage about 300 doors of all different property types, so I feel like it's a pretty good sample size).

45-55%, if you include vacancy/rent-loss and capex along with expenses.  This is an average over a long period of time (20+ years), large geographic areas and lots of different types of properties.

Do a search here for "50% Rule"...

2 of my properties that I have a 4 year history on, have been about $1,550 annually (for maintenance and "improvements").  Improvements would be costs to keep up with other properties in the area (for example, I installed granite kitchen counters after tenants of 4 years moved out).  The $1,550 does not include vacancy loss, and doesn't include my time to manage (I don't pay PM costs).  

Okay, that's great to know. Thanks for the input. A follow up question would be do you use that "50% Rule" when calculating cap rates, or do you use a different % to not include capex? 

Originally posted by @Yishi Garrard :

Okay, that's great to know. Thanks for the input. A follow up question would be do you use that "50% Rule" when calculating cap rates, or do you use a different % to not include capex? 

Technically, NOI doesn't include capex (and therefore, technically cap rate doesn't include capex). When I look at something resembling cap rate, it's typically to determine my cash-on-cash return on an all-cash purchase, and for that, I want to factor in capex.

So, I don't tend to care too much about cap rate, but more so about cash-on-cash return...so I'll include capex in the equation.

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