How much for repairs and vacancies

32 Replies

Wondering if any of you out there have some sort of "formula" you use to estimate repairs/maintenance and vacancy reserve costs when evaluating a new property?
I have been sort of guessing on mine so far and doing 5% for vacancies and 6% or so for repairs

Thanks

My magic number is 0%, because I don't see the point.  If I'm renting a house for $500/month, that means (at 5%) I'm saving a whopping $25/month...or and enormous $300/year just in case, just in case what?  If my roof leaks and I have to replace it, at month 6, am I going to be able to with all that money I'm saving per month up to that point ($150 = 6 z $25/month)?

OK. let's say I'm renting for $1000/month.  Now at $100/month I'll have some big time dollars saved up (at month 12) = $1200.  Still can't replace my roof, and at 6 months, with $600 I can do a half way decent "patch job"...maybe.

Another reason I don't take anything out is all it will do is take me out of a good deal...for no good reason.  

1 - Before I factored in the "fudge factor", I cash flowed at $350/month...and the house passes one of my criteria.  

2 - After I factor in the "fudge", it cash flows at $250/month...and I pass, when I shouldn't.

The answer is to calculate how much the big three would cost you to replace (roof, HWH, furnace-A/C) and set it aside from the beginning as part of your purchase/rehab cost. One great source for this is a LOC. ANother great source is the extra money you get when you "cash out" refi.

I agree with Joe. We are constantly paying down debt and don't worry so much about what ifs. We never have. In fact if I had worried and calculated and fretted as much as some do about what could go wrong, I probably would still be an accountant, sitting at my desk all day. 

Actually most houses stay rented so we don't actually worry about vacancies. We also focus on properties that rent for close to 2% rent/cost and then cashflow any repairs.

The secret is to have a bunch of properties and have enough cash flow to pay for repairs. 

Cheap house rentals are the best!

I have heard most investors factor in 10% for vacancy and maintenance on a newer or recently rehabbed property and 15% for an older property for SFH.

@Seth Mosley  

I'm conservative. So, I factor 10% each for repairs, PM (I self manage), vacancies, $50 per month for capex and then PITI. I must get a $100 per door after that. I sleep better at night with all those securities built in. In reality, I store all that cash flow into accounts for each property and the what ifs. Once I hit about 6 months of PITI built up, I take the rest of of the cash flow into one account for another purchase.

Laura, who did you hear that from. I have never heard that "most" use those factors.

We have been buying rentals for 12 years and vacancies are basically non existent. People do move out and we may lose a week or two to repaint and clean up, or if we rehab a house we might lose a month or a few months, but those are not vacancies per se. Vacancies are when a rental sits not occupied and there are no renters to be had for an extended time. Having a rental ready, with no one to rent it is a vacancy. A turn around is not really a vacancy.

That is the way I see it.

Personally I agree with Joe and don't set aside a percentage for vacancies or repairs. But I think it largly depends how you invest. 

When I calculate my cash flow for a single family I look at PITI and that's it. Partly that works for me because I rehab my properties completley when I buy them, so for the next 10-30 years there should not be any major repairs (other tha caused by accidents like a flood or a falling tree). By that time I will refi and the appreciation on a single family over 10-30 years should more than pay for some rehabs. Turnover has not been a major factor for me, I have a lot of young families with kids and they like where they are. So, no I don't even calculate my cashflow this way, but let me say that my bank likes it that I keep a cash reserve pool of about 6 month PITI and quite frankly it let's me sleep better too.

However, I can imagine this looks different for an aging multi family development. Tenant cycles are a lot more frequent, probably one to two years in average and every time there will be some vacacies and turnover cost. Market value on a multi family depends on its income which will generally decline as it ages, while I would not bank too much on appreciation. So setting aside 12-17% for maintenance and vacancies seems to be prudent. Of course there are certain upsides to MF as well, but that's an entiely different discussion.

Originally posted by @Arlan Potter :

I agree with Joe. We are constantly paying down debt and don't worry so much about what ifs. We never have. In fact if I had worried and calculated and fretted as much as some do about what could go wrong, I probably would still be an accountant, sitting at my desk all day. 

Actually most houses stay rented so we don't actually worry about vacancies. We also focus on properties that rent for close to 2% rent/cost and then cashflow any repairs.

The secret is to have a bunch of properties and have enough cash flow to pay for repairs. 

Cheap house rentals are the best!

 I have heard the "2% rule", can you please elaborate on how that is figured in your case?

Originally posted by @Seth Mosley :

Wondering if any of you out there have some sort of "formula" you use to estimate repairs/maintenance and vacancy reserve costs when evaluating a new property?
I have been sort of guessing on mine so far and doing 5% for vacancies and 6% or so for repairs

Thanks

I normally take of between 10-15% from the bottom line on my SFH purchases

So you deduct taxes, insurance, property management fees and then another 15% from that figure.

Thanks

@Seth Mosley  

I disagree with @Joe Villeneuve  

IMO, not setting aside any money will get a lot of newbie investors in trouble. As far as how much you should set aside for major expenses will depend on remaining useful life. For example, you rent your property for $1,000 per month. If your roof still has another 10 years remaining and it will cost you around $5,000 to put a new roof, set aside $42/mo for new roof. So about 4.2% of monthly rent. As your rent goes up, keep the % at 4.2% to account for any inflation down the road.

New a new HVAC in 15 years and it will cost $2,500 to put a new one, set aside $14/mo or 1.4%.

Once you put in a new roof, new HVAC, etc. reset how much you need to save based on the new useful life.

In addition to this, I would account for 1 month of vacancy and about 5% for general repairs and maintenance.

Hope this helps.

@Seth Mosley  Please go back and read what I said.  I never said I didn't set money aside, what I said was I think it is useless and counterproductive to take our a % from the rent.

Based on your comments, you are assuming that you have 10 years left in your roof, and 15 years for your A/C unit.  What if something happens before then?

Answer:  I'm covered...and you're not.

@Sharad M.  

The only reason for someone to set aside any money is if they only buy one rental. In which case they should set aside 100% until they get the property paid off.

In fact all money should be used to buy more properties, pay down debt, fix stuff, until you get enough properties so that you can quit your job. 

Reserves make no sense.  Unless it is a 100% reserve, because the rental income is not to live on. 

Originally posted by @Joe Villeneuve :

@Seth Mosley  Please go back and read what I said.  I never said I didn't set money aside, what I said was I think it is useless and counterproductive to take our a % from the rent.

Based on your comments, you are assuming that you have 10 years left in your roof, and 15 years for your A/C unit.  What if something happens before then?

Answer:  I'm covered...and you're not.

 Joe, I believe this message was meant for me.

I have different way to pay for capital expenses than you, which is fine. If I am buying 10 properties a year and I know 10-15 years down the road, I will need $7,500 per property for capital expenses, I will not want to set aside $75,000 now for those expenses. I will use that $75,000 to add more properties and set money aside from rental to cover for capital expenses.

@Arlan Potter  I agree with @Joe Villeneuve  that cash flow (vs appreciation) is the money to live on, whether you choose to do that or not, that's a different story.

cash flow to live on at some point, When you have an empire. Until then, reinvest 100%.

What I meant by "to live on" was that most don't buy a rental property to live on the income today. It is for a supplement to retirement, or to build something for full time money. And that takes a lot of paid for rentals.

@Sharad M.  Correct on both accounts.  You're right, that we have different ways of doing the same thing...but it looks like both of us are proactive instead of using CF% to address the issue.

In a way I do what you do. I also don't set aside the full amount for each house. Once I reach a certain point, one total should be enough to cover all properties. The main way I do it though is by having an LOC available for use to cover these "surprise" expenses.

Originally posted by @Arlan Potter :

cash flow to live on at some point, When you have an empire. Until then, reinvest 100%.

What I meant by "to live on" was that most don't buy a rental property to live on the income today. It is for a supplement to retirement, or to build something for full time money. And that takes a lot of paid for rentals.

 I do.  So do most of the investors I know.  That in fact, is the goal.

that is the goal. To live on the money and to have a vacation home(another rental)

Originally posted by @Arlan Potter :

that is the goal. To live on the money and to have a vacation home(another rental)

 Short term goal, that extends until you.......

Has anyone had much experience with ahs or other home warranty companies? I've personally carried it on all of my properties that have some form of central hvac (as opposed to window units) - and it has saved us a few times - covers hot water heaters as well too

Then at least I don't have to plan for a new hwh or hvac

Roof is another thing...

Originally posted by @Joe Villeneuve :

@Sharad M. 

In a way I do what you do. I also don't set aside the full amount for each house. Once I reach a certain point, one total should be enough to cover all properties. The main way I do it though is by having an LOC available for use to cover these "surprise" expenses.

Joe, isn't that the same thing as setting some money aside for reserves? You have the luxury to have the full amount set aside up front without taking money out from your cash flow each month. But if your LOC wasn't available, then you would be setting money aside from your cash flow?

@Sharad M. Yes. That is the same thing. I never said I didn't have a fund to cover this. All I'm saying is I don't think it is practical to do it at 10% of the rent each month. What possible good would setting aside 10% of a $1000/month rent ($100) do to cover the potential problems what they arise? With my LOC in place, or my REFI "Cash Outs" applied for the fund, I can keep the CF where it belongs...in my bank account.

Originally posted by @Joe Villeneuve :

@Sharad M. Yes. That is the same thing. I never said I didn't have a fund to cover this. All I'm saying is I don't think it is practical to do it at 10% of the rent each month. What possible good would setting aside 10% of a $1000/month rent ($100) do to cover the potential problems what they arise? With my LOC in place, or my REFI "Cash Outs" applied for the fund, I can keep the CF where it belongs...in my bank account.

 Then if one prefers to have everything set aside up front, then instead of saving 10% each month, save 100% of the rental income till you have enough for major expenses.

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