Rental Property Investor · Boise, ID · Member since 2019 · 46 posts · 14 votes
Looking to purchase a long distance rental in a lower market and I will be looking to pay cash for the unit. One question when running the numbers is should I expense a vacancy percentage? Taxes and insurance will already be accounted for. Should I double up another expense( R&M, CapX ) since it'd be an older house or would that just go into the cash flow?
Obviously I'd love for it to go into the cash flow but want to play it smart and get everyone's opinion. Thanks!
Rental Property Investor · Columbus, OH · Member since 2019 · 32 posts · 12 votes
5y
Hello Todd,
I would always account for a vacancy expense when running numbers. This is because you are always susceptible to vacancy, regardless of how you pay for the property. I typically estimate my vacancy expense based on the rental market in the area and the property type. For example, if I am in an A neighborhood with a desirable 3Bed/2Bath home I will typically account for lower vacancy - maybe around 5%. If I am in a C neighborhood with the same property, I may account my vacancy to be 10-12%.
You should also account for CAPEX, repairs and maintenance as you will always be susceptible to these expenses as well, regardless of how you pay for the property. Typically I try to estimate my repairs and maintenance based on the condition of the property and neighborhood. If the property has newer appliances, HVAC, roof, siding, driveway, etc, I will account less for CAPEX - maybe around 5% and if they are old I would account for 10-15%. For maintenance I typically estimate around 10% in repairs just to be safe. This may be aggressive, however I would rather account for the worst case scenario to ensure I am still cash flowing than buy a liability.
For my first investment property I made the mistake of not properly accounting for CAPEX and repairs and it turned to what should have been a cash flow king of a property to actually breaking even. Almost every month there was an issue happening to the property - new furnace, new water heater, repair to leaky toilet, exterminator, etc. If I would have properly inspected the property, I would have either negotiated for the seller to repair/replace or accounted for the repairs in my numbers and would have saved me a lot of issues. However, I learned a lot from that property and will not make that mistake again.
Some differences that come to mind when accounting for paying all cash as opposed to financing would be:
Rental Property Investor · Concord, GA · Member since 2015 · 3k+ posts · 3k+ votes
5y
We account about 1 month per year for vacancy. We never have a problem renting them but turnover takes some time as we do them ourselves. properties with no loans sure do cash flow better...
Rental Property Investor · Boise, ID · Member since 2019 · 46 posts · 14 votes
5y
@Alan McClain thank you Alan for that explanation! That makes a lot of sense and makes me especially putting more away for repairs since I’ll be buying an older property. Thank you!
Investor · Dallas, TX · Member since 2015 · 446 posts · 197 votes
5y
@Todd Mason
Yes definitely. It’s not an expense per se, but it’s how you account for lack of income. You’re trying to determine your cash flow I assume when making these calculations so you need to look at both sides of the ledger: what goes out (expenses) and what comes in (rent).
If it’s a good property and you screen well, maybe you have one month vacancy every three years. BUT - you will also have turnover costs when that happened and hopefully the three months vacancy (one per year) you accounted for will cover your vacancy AND make ready on the turnover. One month vacancy is 8.33%.