Maintenance/CapEx allowances

[Brett Russell]

I have been looking at a number of potential rental properties (single family and small multi family) and trying to do quick analysis with the 50% rule. Many of the properties are lower priced with, therefore, lower rents, but often still meeting the 2% rule.

I understand that landlord covered utilities and tenant quality will play a big role in all expenses, but all other things being equal, is it really safe to assume a simple percentage of gross rents for maintenance and capex?

It seems to me that the cost to repair a leaky faucet or replace a water heater or 1000 sq ft of flooring is going to be pretty much the same whether it's on an $70K house that rents for $1200 or a $30K house that rents for $650. Thus, as a percentage, those expenses would vary significantly for those 2 example properties. Is that incorrect? If not, should I be using a 60% rule for extra safety when expected rent gets below a certain level?

What are other people doing? Budgeting a fixed amount or a set percentage of gross rent towards maintenance and capex? Do you make any adjustment if it's a lower priced property (again, assuming tenants are similar quality)?

[James Syed]

@Brett Russell First of all, the average expense ratio for a multifamily is between 40 to 60% (with management).

There are fixed expenses that will NOT change whether your rental income is $650 or $1,650, for example, insurance, trash, lawn care, water & sewer. In other words, there is cut off cost that will always be there, so if your rental income is on the higher rent, your cash flow will be better.

In general, the quality of tenants has to do with quality of your property. Better properties attract better tenants.

There is no simple answer to your inquiry, however there are guidelines that are good to follow like some I have mentioned above.

[Brett Russell]

@James Syed , thanks for your response. I think your phrase of "fixed expenses" that won't change based on rent gets to the heart of my question: should maintenance and capex be a fixed amount per door (and if so, how much?) or a percentage of rent?

As I explained in my original post, it would seem to me it should be some relatively fixed amount, but I don't have the experience to know for sure.

Anyone else with input?

[Bill Jacobsen]

I agree that expenses will average between 40%-60% of rent. One problem is that this is too wide a range to use to determine whether a rental property is a good buy or not. The other problem is that no expense is dependent on how much rent you collect except management and vacancy. Size of property, age of property, age of components are more accurate indicators. For instance, a new $7,000 roof with a 30 year life is $233 per year while one with 5 years of life left is $1,400 per year.

I have made the mistake in the past when going from $100,000 rentals in Oregon to $40,000 rentals in Florida. Although property tax rates are much lower in Florida all other expenses are higher compared to property values and rent income.

This is a very good question and I have helped in some way.

The best to you.

Bill

[Robert H.]

"I have made the mistake in the past when going from $100,000 rentals in Oregon to $40,000 rentals in Florida. Although property tax rates are much lower in Florida all other expenses are higher compared to property values and rent income."

Can you give details on the extra expenses in Florida compared to Oregon?

[James Syed]

@Brett Russell I am glad you followed up.

You are correct about maintenance and capex, they are to an extent "fixed cost". I say to extent because if the property is 5 years old vs 50 years old, your maintenance number would definitely fluctuate, and your capex would change not as much.

For a single family house, I use a minimum of $1000 for capex and for a fourplex or more units, I use a minimum of $350 per unit capex.

In terms of maintenance, I use a minimum of $1000 for a single family and $600 per unit for a multifamily property.

Like @Bill Jacobsen mentioned it's a too big of range to cover.

I also think it's a great question.

Hope it helps.

[Bill Jacobsen]

I did not mean to say expenses were higher in Florida but that they were not related to the price of the house or the amount of rent collect. The houses I purchased in Florida were much less money and on average I collected a little less rent. The maintenance/cap. ex. seemed higher when compared to purchase price or rent collected.

James explained this much better than I did.

Bill

[Lou R.]

"For a single family house, I use a minimum of $1000 for capex and for a fourplex or more units, I use a minimum of $350 per unit capex.

In terms of maintenance, I use a minimum of $1000 for a single family and $600 per unit for a multifamily property.

@James Syed Thanks for the tip - this should help steer me in the correct direction.

@Brett Russell Thanks for the original post, I had the exact same question this evening, and came across your post. What estimates did you end up using? Any other suggestions you can pass on for budgeting maintenance expense and capex?