What % Do You Use for Expenses & Vacancy on a Rental Property?

51 Replies

10% is conservative. The standard is actively what the bank's underwriters say what should be used regardless of the performance history of the property. 

Vacancy: 10% 

Pairs: 5% 

Capitol reserves: 5%

management: 10% 

I usually take 40% or 50% (depending on neighborhood) off the gross collective rents for expenses. 

Michael Henry, Real Estate Agent in WI (#56929-90)
4146171740

Many here use the "50% Rule," which basically says that over a large number units in diverse locations and over a long period of time (20+ years), expenses + vacancy (rent loss) + capital costs will tend to be in the 50% range.

This DOESN'T mean:

- Any one property will follow this rule

- Any particular area will follow this rule

- Any short period of time will be defined by this rule

- Etc...

Many of us use this rule as a first-pass analysis tool -- if using 50% indicates a good deal, we'll dig in further to try to find more accurate/precise numbers.

I use one %. Monthly rent/purchase price. The closer to 2% the better.

Vacancy   0%.  Over time the percentage approaches zero. Most tenants stay long term.

Repairs.  0%.  Over time it also approaches zero. Most of my rentals require no repairs each year.

This may sound simplistic but like it or not, if you buy right the rest will work out. Over time I will have repairs  and will pay for it out of monthly portfolio cash flow. I don't use reserves, I pay down debt. 

This post has been removed.

Originally posted by @Ryan M.:
Originally posted by @Arlan Potter:

I use one %. Monthly rent/purchase price. The closer to 2% the better.

Vacancy   0%.  Over time the percentage approaches zero. Most tenants stay long term.

Repairs.  0%.  Over time it also approaches zero. Most of my rentals require no repairs each year.

This may sound simplistic but like it or not, if you buy right the rest will work out. Over time I will have repairs  and will pay for it out of monthly portfolio cash flow. I don't use reserves, I pay down debt. 

Where do you find these with 0% repairs/vacancy.....it sounds almost to good.

We are averaging 8.4% repairs & 3.7% vacancy over the past 10 years.

Originally posted by @Arlan Potter :
Vacancy   0%.  Over time the percentage approaches zero. Most tenants stay long term.

Repairs.  0%.  Over time it also approaches zero. Most of my rentals require no repairs each year.

What do you mean "over time the percentage approaches zero?"

Are you saying that vacancy is higher when you first purchase the unit and then it decreases over the years?  Why is that?

What brand of toilets do you buy that never need to be repaired?  What brand of paint do you use that never needs to be repainted?  What type of HVAC system do you use that doesn't need to be replaced?  Do your water heaters last forever?

I don't understand how you avoid ever needing to repair stuff in your units?  I take good care of my own house, but I don't remember the last year when I haven't needed to do ANY repairs...

Originally posted by @Ryan M.:
Originally posted by @Ryan M.

Where do you find these with 0% repairs/vacancy.....it sounds almost to good.

We are averaging 8.4% repairs & 3.7% vacancy over the past 10 years.

The original question was about expenses when evaluating rentals. I still maintain that it doesn't matter to me. I am more concerned with the rent to cost %. Expenses will take care of themselves it the property is bought right. I also say that in most years, I have no repairs on the majority of my rentals. Therefore a repair on one house is almost nil when factored against the rents from 60+ rentals. 

Vacancies as well. In our area, for the last ten years, vacancies are also nil. Rentals are hard to find, so very few leave, and when they do, we have a waiting list. 

Texas is generally a 3-5% VC expense depending on the property

Originally posted by @J Scott:
Originally posted by @Arlan Potter:
Vacancy   0%.  Over time the percentage approaches zero. Most tenants stay long term.

Repairs.  0%.  Over time it also approaches zero. Most of my rentals require no repairs each year.

What do you mean "over time the percentage approaches zero?"

Are you saying that vacancy is higher when you first purchase the unit and then it decreases over the years?  Why is that?

What brand of toilets do you buy that never need to be repaired?  What brand of paint do you use that never needs to be repainted?  What type of HVAC system do you use that doesn't need to be replaced?  Do your water heaters last forever?

I don't understand how you avoid ever needing to repair stuff in your units?  I take good care of my own house, but I don't remember the last year when I haven't needed to do ANY repairs...

 I understand your point of view, and I do have occasional broken toilets(usually caused by the tenant). But for new investors, I think they should focus less on broken toilets and more on knowing the rental market in their area, and finding rentals at a cost that has a high % of monthly rent to purchase price. Most focus too much on the negatives, and analyzing deals  to death, and never buy any rentals. Now if you are looking at a $4 million dollar apartment deal you might want to check a lot of factors, but not so much on one rental.

Originally posted by @Arlan Potter :

Most focus too much on the negatives, and analyzing deals  to death, and never buy any rentals.

I'd argue there are more people who don't analyze deals enough, and end up with negative cash flow properties because they ignored basic expenses...such as vacancy and maintenance...

Originally posted by @J Scott:
Originally posted by @Arlan Potter:

Most focus too much on the negatives, and analyzing deals  to death, and never buy any rentals.

I'd argue there are more people who don't analyze deals enough, and end up with negative cash flow properties because they ignored basic expenses...such as vacancy and maintenance...

 If they look for properties that are approaching 2% per month, then the expenses will take care of themselves. I know a lot of Landlords and none are crying to me that they have negative cash flow. They don't buy houses that have less than 1% per month! with a high mortgage and high property taxes and replacement cost insurance.  

I again say that newbies should look more for houses over or well over 1%.

I am sure there are many with one house that could get in some trouble. 

I will tell you that the first three rentals I bought, 2 have had the same tenants for over 9 years, the other had 3 tenants over the same period. A vacancy % of virtually ZERO.

Originally posted by @Arlan Potter :

 If they look for properties that are approaching 2% per month, then the expenses will take care of themselves.

You're presuming that everyone is looking for the same cash-on-cash return you are. What if they're looking for a higher COC than you typically do? In that case, they may need to purchase at better than 2% per month. Or maybe they're willing to settle for a lower COC, in which case they might be able to get away with 1.8% per month.

Without the know-how to properly analyze a deal (for example, if they just assume vacancy and maintenance costs are zero), there is no way they can accurately determine if a property meets their goals.  And telling them to just buy at 2% is basically telling them that your desired level of return is the same for everyone.

It's not.

Ok. I guess, if I have to. 

The thing that is rattling around in my head is how flexible this 50% rule is.

What I mean is, does the rule apply to the 1% rule, the 2% rule?

Cost of repairs and capex are set in the sense that there is not relationship to the rent.

Management and Vacancy are related. But here again, vacancy and it's expense relate at the very least to our ability to cover financing costs.

So, if I have a 100k house that I rent for 1,000 I should be keeping 500 for expenses. If I rent that same house for 2,000, do I now need to keep 1,000 for expenses?

What I'm really looking for help with is trying to figure out the right balance between having the right reserves for expenses and raising capital\paying down debt.

Originally posted by @Bram Spiero :

What I'm really looking for help with is trying to figure out the right balance between having the right reserves for expenses and raising capital\paying down debt.

Bram,

Some Investors either have cash or properties. I have never had reserves. Why would I have cash sitting in the bank when there are nice properties available to add to my rental pool. We keep buying and in the between times we pay down the lines of credit. Have a Line of credit or credit cards available for major repair, and cash flow the regular minor repairs.

We have been buying properties for 12 years now, and it has always been a game of continuing to scramble for funds to continue to buy. Any funds we get, or loan packages, of windfalls, we use to buy properties. And now we have enough cash flow each month to handle a major repair and some regular minor repairs each month.  

Go find a cheap house and get in the game. Or not. Or sit on the sidelines and think about it some more. REI is not for everyone.

Originally posted by @Arlan Potter :
Originally posted by @J Scott:
Originally posted by @Arlan Potter:

Most focus too much on the negatives, and analyzing deals  to death, and never buy any rentals.

I'd argue there are more people who don't analyze deals enough, and end up with negative cash flow properties because they ignored basic expenses...such as vacancy and maintenance...

 If they look for properties that are approaching 2% per month, then the expenses will take care of themselves. I know a lot of Landlords and none are crying to me that they have negative cash flow. They don't buy houses that have less than 1% per month! with a high mortgage and high property taxes and replacement cost insurance.  


I buy properties that meet or exceed the 2% rule (and sometimes exceed 3%). And yet I still put away money every month out of the rent for repairs, maintenance, and vacancy.  Even though I have tenants that have stayed for years, I still put that money away.  Why? Because it's better to have adequate reserves than for life to suddenly dump on you and have you wind up scrambling.

Originally posted by @Dawn Anastasi:

I buy properties that meet or exceed the 2% rule (and sometimes exceed 3%). And yet I still put away money every month out of the rent for repairs, maintenance, and vacancy.  Even though I have tenants that have stayed for years, I still put that money away.  Why? Because it's better to have adequate reserves than for life to suddenly dump on you and have you wind up scrambling

Dawn, you must be a cash buyer/investor.

 Here is what I do:

Put all the rent into the bank

Pay the expenses

Take out $500/week for wife to spend

The rest pays down debt

If I need money other than the monthly cash flow, it comes from the line of credit that I have been paying Down.

I guess that in a few years, when I get everything paid off, I might have cash reserves. Maybe. Some.  Probably won't happen. Too many deals just keep showing up. But...

Let's see:

All paid for rentals generating about a net of $20k per month cash. Take $5K for the wife's checking account. What to do with the rest? Give it to charity, Invest in the stock market, leave in the bank for reserves for whatever, or buy more rentals. Probably give it away and buy more rentals. But will not likely ever sit it the bank for reserves. It is hard to have reserves when we are buying 4 rentals this month.

@Brandon Sturgill  Thanks for posting the question. I'm a spreadsheet guy and realize that adjusting my percentages up or down can make deals look obscenely good or obscenely terrible. I own four properties in B and C class neighborhoods. At the moment I run my analysis with 10% property management, 10% vacancy, 10% maintenance and 5% cap ex. I have purchased and rehabbed three of the properties in the last 12 months, so I'm looking forward to seeing what the actual numbers will be over 12 to 24 months.

Mike

What many of you are missing, is that the "50% rule" is an AVERAGE rule.  If you've ever studied statistics at all, you know that you are not always going to be hitting on 50%, every time.  The person above who says that his maintenance and vacancy are close to zero - I don't know him, but I'm not going to assume that he's lying.  But what I do know is that his case is the exception, not the rule.  Some properties will have less than 50%, some will have more than 50%.  How much more or less?  I don't know, because the rule is never stated with the corresponding number for the standard deviation.

Think of it this way - when you flip a coin, you know that it will turn up on tails 50% of the time on average.  Is it possible to flip three coins and have them all turn up to be heads?  Yes, it is very possible (the odds of this occurring are 1:8).  When you buy an investment property, the highest odds are that your expenses will be 50%.  But there are also properties out there that have higher or lower expenses.

Originally posted by @Arlan Potter :
If I need money other than the monthly cash flow, it comes from the line of credit that I have been paying Down.

I guess that in a few years, when I get everything paid off, I might have cash reserves. Maybe. Some.  Probably won't happen. Too many deals just keep showing up. But...

You DO have cash reserves. It's your LOC. The way you're using it (paying it down from your cash reserves when you have extra cash), it's no different than cash...it's just a different hierarchy of moving cash from one place to another.