Property Analysis - Rules of Thumb

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Property Analysis - Rules of Thumb

Jared W SmithBusiness Member
Architect · Westchester County, NY · Member since 2018 · 681 posts · 476 votes

Hello all, 

I am constantly running analysis on prospective properties so I familiarize myself with the correct metrics, terminologies and what a deal actually looks like. I know there are several rules of thumb that I've seen sprinkled around forum and are stated on many podcast. Bear in mind I am looking to invest in the NY market.  Should I adjust any of these? 

  • Operating expenses (not itemized; excludes debt service/mortgage) = 50-60% of rent
  • Down payment (If seeking bank financing) = 25% min of purchase price 
  • Closing cost = 2-3% of purchase price 
  • Property management = 8-12% or rent
  • Vacancy = 8-10% of rent 
  • Maintenance = 5-8% of rent 
  • Capital Expenses = 5-8% of rent 
  • Insurance (multi-family residential) = $75-100/unit/month 
  • Income growth = 1-2%
  • Property growth = 1-2%
  • Annual expense growth = 1-2%

Any insight is greatly appreciated. Thank you all    

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  • John Warren
    Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes
    7y

    @Jared W Smith you will need to be a lot more specific on the type of property you are looking at. Is this a single family? Multi family? Apartment community? Commercial strip center? Industrial? These all have nuances that you need to know. 

    The 50% rule holds true in a very broad sense when looking at apartments, but this is very area specific. In Chicago, where I am buying, it is not uncommon to see expenses run a bit higher (closer to 55%) due to boiler heat, cold winters, flat roofs, etc. 

    Down Payment- This is literally all over the place. I have folks putting down 3.5% for FHA or 5% for conventional owner occupant loans. I normally put down 20% for my apartment investments. Some folks put down more.

    Property management- 8-12% is way high if you are looking at anything other than SFR. I pay 5% on one of my buildings (plus lease up fees).

    Vacancy- Again, this is very area specific. Real vacancy in the Chicago western suburbs where I invest, has been hovering around 5.5%. 

    Maintenance- 5% is a good starting point. Get more detailed if a deal starts to make sense. 

    CapEx- 5% is a good starting point. Get more detailed if a deal starts to make sense.

    Insurance- I get real quotes from brokers once I am interested. 

    Income growth- 1-2% seems pretty  low... we need to keep up with the 3% inflation historical norm. 

    Annual expense growth- Normally tracks along with your income growth. 

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  • Jared W SmithBusiness Member
    OP
    Architect · Westchester County, NY · Member since 2018 · 681 posts · 476 votes
    7y

    Thank you very much for your response @John Warren. 

    I am seeking to purchase a multi-family 3-5 unit residential property. It will be purely investment property. I will not occupy at all. 

    I have been very conservative with my numbers giving myself some leeway for unforeseen issues. Property Management being on of those. I have researched my area and it seems 10% is rather normal for a small number of units. Obviously as it  grows the economy of scale will be in my favor.  

    Thanks again for your insight. 

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