What % of rent is a safe estimate for Vacancy/Capex/MGMT/repairs?

Question

I was wondering, when analyzing a potential property to purchase, what % of rents do you account for to be vacancy, capital expenditures, property management, and repairs? I am starting to practice analyzing deals and running the numbers, but I do not want to lowball my expenses, or overestimate either. I was wondering what others in the community do when it comes to estimating these costs.

Ben Zimmerman · Answer

10% is fairly standard place to start for each category, but never trust any calculation based on a flat percentage.  I don't use percentages for anything, as there are too many variables which causes them to be wildly inaccurate.  Using the numbers quoted above, your average home in San Francisco which costs 1million, and rents for 3500+ would require 4200 in general repairs per year, and 4200 in cap ex, which is insanely high.  Likewise newer homes will generally have significantly less general maintenance than something built in the 1950's.  Investing in A/B neighborhoods tends to attract better tenants than in C areas which causes significantly less wear and tear as they tend on the whole to take better care of the property ect ect.

Also, I tend to price my rentals slightly below the norm.  This keeps my vacancy rate virtually non existent, and my maintenance just as low.  If you estimate for 10% vacancy, that means on average your house sits empty 5 weeks out of the year, which is probably high but for the sake of argument we'll go with it.  If you're charging 1000/month, I can afford to charge as little as 900/month and we still come out even at the end of the year if I get a long term tenant.  If I charge 950, the tenants typically want to stay since it's still the cheapest place in the neighborhood and I generally speaking come out ahead financially, at the end of the year I can evaluate them and decide if I want to renew their lease or if they are a problem tenant I simply don't renew and can quickly find someone else.  This causes me to have essentially nothing but long term tenants that generally take very good care of the property.  Thus reducing not only my bills, but drastically reduces the amount of time I spend screening tenants, managing the property, and running around doing all the little things.

Kenneth Mooney · Answer

I always do 10% management fee, 10% maintenance fee, 5% vacancy fee (strong rental market in Augusta, GA), then I estimate what insurance is based off of other properties, and I look up the taxes in the local Tax Assessors website and go from there.

If you do not know what the insurance would be then just call an agent and get a quote and use that.

I'm not sure if you are looking to buy as a rental but if you are make sure you have a minimum cash flow per door!

Lionel Li · Answer

Overhead is definitely considered in my 'business'. The expenses aren't individually tacked onto my properties because that would be my cost to run my business (unless you only plan on owning one investment property). The profit would essentially be shared from all of my properties therefore the cost of overhead would be spread across all of my investments. For me at least, the overhead costs can't be calculated per property because it won't be the same once I've obtained more investments. One property cash flowing $10,000/yr with ($3,000) CPA/Legal/LLC/Assistant etc. costs will net me $7,000 but, then (2) properties cash flowing $20,000/yr with ($4000) will net me $16,000. Overhead costs typically are incremental and remain pretty constant (unless you have one property per LLC), 1 property with $3000/yr OH costs doesn't mean 2 properties will cost $6,000/yr, unlike operating expenses which are usually multiplied by however many properties you have.

I want to see my property's true performance and not taint it with costs that I've incurred by doing business (that's a Me problem). The fix to this problem is to scale up and to grow my portfolio so that I can spread this expense as thin as possible from a high level view.

Josh Stack · Answer

Morning @Lionel Li,

That's a completely fair way to look at it.  I do agree that O&A costs are not linear, spreading costs over one house vs five vs ten is going to give very different overhead/month/house figures.  I am simply pointing out that it's something I don't see considered in anyone's analysis but is a real cost that has to be taken into account and managed at some point.

If O&A costs aren't considered, then we are fooling ourselves that our investments are performing better than they are in reality.

Josh Stack · Answer

Hey @Lionel Li and @Jim Murray,

Thanks for sharing your data points, it's really helpful to see what others are doing and compare notes.

From my previous life, I calculated time charters for ships and the calculations we were making are basically the exact same (in principle, not specifics) that we are making for our rental properties.

One thing we always included in our shipping calculations is Overhead and Administration.  I don't see anyone including overhead - either their own time or other 'running the business' costs they have and allocating them to their rentals, nor do I see others allocating administration - for example costs of attorneys, CPAs, bookkeepers and upkeep of LLC holding companies to their rentals.

Am I missing something or are we just ignoring these expenses and not figuring them into our calculations.  They are of course direct costs from our buy and hold businesses, just spread out over multiple properties instead of the one we are calculating at any given time.

Lionel Li · Answer

Hey Josh,

I've noticed the same thing about your statement above. I've built-in my PM's new lease fee every year (assuming I have a new tenant every year) and it averages out to about 16%, I don't cut corners when it comes to estimates because it never hurts to over-budget, the reserve funds are still yours at the end of every month and you didn't incur any extra expense. However, if you've under-budgeted your estimates and you make a bad deal look like a good deal, that would hurt.  I would try to figure the % in for your market and run a test, I'm assuming you aren't tapped out or leveraged above your head for your rental so you should have some cushion to use for other investments if it comes up.

Best of luck!

James W. · Answer

Josh, The time would be figured into the management fee.  You can pay someone around 10% to manage it for you or deal with it yourself.

Jimmy Murray · Answer

@Josh Stack I typically use 8% Vacancy, 5% R&M, 5% Capex and 10% property management in my model. It is way safer to build a conservative model and have a financial surprise to the upside.

Josh Stack · Answer

Afternoon,

I'm doing some background research on how to calculate my expenses when running financial models for deals.  I have typically been using 5% Vacancy, 10% R&M, 10% Capex and 10% Property Management as my starting point but in many cases this feels a bit like it's being too conservative on the R&M and Capex side.  For insurance and property taxes I'm using actuals and all these costs added up are getting me pretty close to the 50% line for operations expenses.  Depending on the condition of the house, I sometimes lower the R&M or Capex lines to 5% but this starts to feel a bit risky - am I just juicing my numbers and kidding myself?

How is everyone accounting for additional Property Management costs that may fall outside their 10% fee - for example tenant turns and other fees they may charge.  I don't see these build into the calculations.

Where are costs for tenant turns being factored in to your figures when they are doing above and beyond the deposit that you can keep?  Is that figuring into R&M?

What % of rent is a safe estimate for Vacancy/Capex/MGMT/repairs?

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