Reasonable percents for repairs, vacancy, and cap-ex

12 Replies

Hi BP community, this is my first post!

I am looking for a 4 unit multi-family and have identified some candidates. I want to know if using 7% (of gross rental income) for repairs, 7% for cap-ex, and 7% for vacancy is reasonable, or too high, or too low when running the numbers. I've talked to several small multi-family owners and none of them account for this much of an expense, but I've seen Brandon on BP videos do it all the time. In your experience, what are reasonable percentages to use (the property is a decent condition 100+ year old building)? If there any any strategies for figuring this out for a specific properties, I am all ears! Thanks!

It really depends on the area and the property. A newer property is going to have lower cap ex than one that has been around for 50 years and has lots of deferred maintenance. I prefer to look at things in terms of dollars per unit per year as well, since rents can very highly between different markets, but the cost of a heat pump (for example) generally doesn't have quite the same degree of variability.

The only variable out of the three you mentioned that can be expressed in percents is vacancy.

The other two (capex and repairs) must be budgeted in dollars. They do not depend on rents and that's why it makes no sense to use percentage of rent to estimate them.

Good advice.  Oops!  I'd actually been using a % for those 2 in my model.  (I'm only looking at 20-40 unit older b-to c+ properties, so probably was safe), but I'll change as well!

As others have said, the operating expenses (repairs, turnover, utilities, etc.) are best represented in terms of $/unit. 

For example, $400/unit per year could be an appropriate figure for repairs to use in your pro forma. 

Things like vacancy, bad debt, and concessions are find to use as a % of income. 

@Hemang S. I own a few 85 year old buildings in the STL area. I use 8% as repair reserve, 5-7% for Capex (dependent upon system updates), and 2-3% vacancy credit loss. I have a lower vacancy because I have found in my multi family portfolio the properties can float themselves at 75% vacancy rate and still maintain positive cash flow. A good starting point is to engage a commercial lender and ask them for their "stress tolerances", which will provide you with how they underwrite a property. This is the minimum starting point for all of my reserve withholdings.

Originally posted by @Nick B. :

The only variable out of the three you mentioned that can be expressed in percents is vacancy.

The other two (capex and repairs) must be budgeted in dollars. They do not depend on rents and that's why it makes no sense to use percentage of rent to estimate them.

 You can absolutely use % to gross income to estimate repairs and cap ex withholdings.  This is exactly how commercial lenders underwrite properties. I have found over the years that when I analyze my portfolios performance there is a similarity in asset type in regard to repair and cap ex total percentage against income. I tweak these figures annual based on percent.  Maybe I am doing things wrong but this method has helped me properly maintain my properties and have plenty of reserves on hand. I guess to each their own. 

One thing to keep in mind is that expenses and vacancy don't happen on a predictable basis. If you own one property, you may have no vacancy, repairs or CAPEX for months or years. Then you may have a bunch of expenses at the same time that far exceeds your allotted percentage. The theory behind percentages is they are an average when you consider a larger number of properties. For example, if you owned 1000 properties, you may find vacancy in any given month is around 7%.That is because with a large number of properties, they average each other out.

I still think parentages are valid for a single property, because over long periods of time you should reach an average. For example over ten years, your repairs would be X%. Just keep in mind that day one, you need money set aside. You could have have a repair in your first month that is greater than 7% of rents. Lower rents generally mean higher percentage over time because you are working off a smaller base. 

@Hemang S.. I will combine some of the comments. Immediate and near term Capex/repairs should be accounted for in dollars. Long term Capex in percentages. The percentage is also contingent on your rent. A refrigerator generally costs the same whether your monthly rent is $400 or $1500/mo. Same with carpet replacement (understanding size will effect cost), therefore lower rent areas need a higher % allocated.

Regarding Capex, it really depends on your view. I would say that is extremely low, but it depends on your hold period and how you budget. A new roof today will still need replaced in 25 years. You can either account for it, little by little over those 25 yrs, or find the money somewhere when it is needed.

Thanks @Greg Franck and @Joe Splitrock ! Since it is one building (and rents are good), I imagine that my estimates based on percentages will be a good amount over the real amount needed. I'll be an owner occupant too, so it should be possible to catch things as soon as they come up, but it's probably a good thing I have a buffer for whatever other mistakes I am bound to make as a new real estate investor.

The rosiest, best ever is 50% expenses to rent ratio for something that sized.  I might even go 60% expenses to rent since it's over 100 years old.  8% vacancy is having each unit vacant for 1 month.  But that's only physical vacancy.  You'll want to account for economic vacancy too (loss to lease, bad debt, concessions, etc).  Economic vacancy increases for C properties compared to A properties.  Multifamily of 100+ units would typically create 44%-50% expense to rent ratio here in Florida depending on  where/age/tenant demographic.

@Hemang S. The responses to this thread with example numbers illustrate exactly what many others have said about not using a number for one region/property class for another. Hearing $400/year for expenses on C-class properties in San Francisco is downright comedic. Try 30% of gross income not counting 20% vacancy loss in rougher, less wealthy C-class metros.