What percentages to use for CapEx and Vacancy in calculator

Question

I have a multifamily in ft Lauderdale, FL deal but im running the numbers and I want to make sure im using the correct percentage in the calculator for Capex and vacancy. Also, how do I find out what the cap rate is for the area? Thanks in advance.

Erik W. · Answer

@Josh Benitez, depending on the age and condition of the property, 3-7% is a typical range for CapEx.

I use 5% for vacancy, which appears to be somewhat "standard" for the industry, but as always it depends on your local market, so this may vary.  Properties in poor condition should plan for much higher rates during renovations.

Call a few commercial Brokers in your area and ask about typical cap rates.

Whitney Hutten · Answer

@Josh Benitez I would ask a local PM on the vacancy rate for the specific area and asset you have (very important).  8% is a good rule of thumb for 1 month, but you will also have leaseup costs... so perhaps 10% until you can verify with a PM.

Capex and maintenance, like others say, are a function of the condition of the property.  Personally, on a fully rehabbed BRRRR, I don't go below 5% for each (10% total).  You will have to replace things over time and having reserves is never a bad idea!

Ryan Daigle · Answer

Hi @Josh Benitez. I'd be wary to use any sort of rules of thumb for cap rate or vacancy - those are both very market specific. The best places to get your market's numbers are from your commercial broker. If you're not using one, then an industry publication like Yardi Matrix is a good starting point. Keep in mind even within a market, you have sub-market fluctuations and wide variance between the asset classes (A, B, C, etc...). You really need to know your market to be able to input an accurate cap rate (and since the cap rate is highly leveraged, even being off by a small amount can have a large impact).

All of the above holds true for vacancy as well. You also have to keep in mind not just physical vacancy, but economic as well (bad debt, loss to lease, etc...).

When you say capex I assume you mean capex reserves? For this there is a widely accepted industry standard of $250/door. However, I would suggest using this as a starting point and layering on what you know of the property. Is it late vintage (over 30 years old?). Are the HVACs all original? How do the roofs look? If you know you have some large expenses due in the next 5 years of your ownership you will probably want to budget higher per door reserves (or factor that into your raise if you're pooling money from investors).

Hope that helps!

Jaysen Medhurst · Answer

@Josh Benitez, I'm a little more conservative in my underwriting than @Erik Whiting.

I use 8% for any MFR and 5% for SFR. 8% translates to 1 month vacant every year. Average tenancy in the U.S. is ~22 months, so that's one month vacant during turnover and also accounts for a month lease-up fee from your PM, which is pretty typical. SFRs tend to have longer tenancy as they are more likely to be rented by families who don't move as often.

I use 7.5% for CapEx. Others 10%. I think as long as you're putting 15% combined aside as reserves for CapEx and repairs, you'll be good.

Erik is right about finding prevalent Cap Rates, brokers and lenders. Just keep in mind that this only applies to commercial properties. Cap Rates don't matter a wit when it comes to residential properties, other than as an internal metric for your own use.

Paul Wachtler · Answer

I agree with Erik.  The only point I want to add for capex/repairs is that it's dependent on the state of the property and whether or not it's going to need the work.  If you're doing a BRRRR and just spent thousands to complete a full rehab then capex and repair costs are likely to be lower in the first few years.  If you have a property that was built 30+ years ago that you've done very little work in your capex and repair percentages should be higher.  Doing research on the big ticket items to see when they were last fixed/replaced should help with the capex percentages - such as when was the roof replaced, flooring put in, water heater, air conditioning, etc.

What percentages to use for CapEx and Vacancy in calculator

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