General % to factor for property maintenance?

Question

Hey all,

I am currently just researching and practicing right now. One thing I have been doing is assessing the cash-on-cash value of certain properties in my town. I factor in vacancy rates and some other stuff, but is there a general rule of thumb that I could put in that would factor maintenance, taxes etc. Like a percentage. I think I heard 15%, but I'm not sure if that is right or not. The 15% would cover all expenses excluding the loan price. Taxes, insurance, ,maintenance, etc.

Any suggestions? I've been plugging properties into the Rich Dad Evaluating program and I figure for someone with no experience, a % would be easier than individually inputting accounting, business, taxes, utilities, etc, since I don't know exact figures for those yet.

Bryan Hancock · Answer

50% is for EVERYTHING, including:

-Vacancy if run properly
-Capex
-Repairs
-Make-readys
-Utilities
-Etc.

Note that varying policies to "all bills paid" or other gimmicks will influence the rents you can charge, so the end result will be the same.  45% is more accurate then 50% from my experience, but dividing by 2 is easier and more conservative.

If you are looking at single-family residences you are either going to have to:

1.  Buy at a huge discount..which generally requires all cash with a subsequent refinance after the value seasons

2.  Put a lot of money down

to get a positive cash flow figure using 50% expenses.  Almost all normally-leveraged SFRs have holistic negative overall cash flow over the course of many years.

Rents - PITI = "Cash flow" is what most newbies use and they are eaten alive by vacancies, capex, etc.  Gurus tell them these are "extraordinary" items, that you can get hit by a bus crossing the street, etc.  People that have been in the game for a long time will tell you that these items are extremely ordinary and that you need sufficient cash reserves to weather the storms and give you staying power.

I have replaced several A/C units this year and one roof already.  I also need to repave the parking lot at one of my apartment complexes.  This stuff costs real money and needs to be accounted for!

The other 3 profit centers will still give you hope of doing well in real estate...tax benefits, appreciation, and amortization of a loan with a third party paying.  Positive cash flow is much harder than it looks on the surface though...especially for SFRs.

Jon Holdman · Answer

The 50% number includes taxes, insurance, vacancy, capital items, maintenance, property management, evictions, tenant damage in excess of security deposits, snow removal, pest control, CPA fees, legal fees, etc., etc., etc.

It does not include principle or interest payments.

On any particular property in any particular year, the 50% number could be wildly wrong.  Unlikely to be less than taxes and insurance.  Entirely possible to be 100% (nasty eviction, furnace replacement) or more.

College town, IMHO, has vacancy of at least 2/12.  That is - summer.  Maybe you're in an area where the kids stick around all summer and its lower.  Maybe you're in a town where they all leave and you have to be one of the lucky ones to avoid summer vacancies.

If a property is brought into good repair (part of the acquisition expense, to my way of thinking), it shouldn't matter whether its 10 years old or 100 years old.  Shoddily built 10 year old houses can be just as troublesome as 100 year old solidly built houses.

Joe Edwards-Hoff · Answer

Big bonus is that I can get those things readily off the internet and listen while at work...

Bryan Hancock · Answer

You are really reading the wrong books IMO.  Tool around the forum some more and/or do a search on "books" to see what others recommend.  What you are reading is what gets newbies into trouble when they start out!

Joe Edwards-Hoff · Answer

Thanks for all the replies guys. I've just started scratching the surface of researching. I've listened to audiobooks from everyone from Rich Dad stuff to Robert Allen. The more I hear from different people the better. I'm happy I found the forum because I feel now I am getting some down to earth advice. Not just sugar coated theories.

I think my town has a lot of potential. Higher rents, but also higher housing costs. I'll keep reading and researching. Maybe I'll be able to get into a foreclosure or something...

Joe Edwards-Hoff · Answer

I've been reading the other threads, but just to confirm, that is 50% in addition to taxes and insurance, or just principle and interest? I did read that it includes vacancy. So far, I have been estimating by using a vacancy percentage of 5% (college town, so it is lower) and then itemizing other expenses. That's why I was hoping to find a general rule of thumb.

Seems that 50% works well with multiunits. Maybe closer to 40% with single family homes that pull in higher rents. Around here a 4 bed 2 bath can pull in 1400 a month on a 1 year lease...

Dale Osborn · Answer

A rule of thumb for expenses on 1960-1970 apartments is 60-65% of gross rents. For mobile home parks the amount is 30-40% of gross rents. Hope this will give you a starting point.

Jon Holdman · Answer

Read in the Rental Property forum about the "50% rule".  That states all the expenses, not including the P&I payment, will be about 50% of the gross rents.  Folks argue that's too high, but its a heck of a lot closer than 15%.

General % to factor for property maintenance?

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