What % Do You Use for Expenses & Vacancy on a Rental Property?
Brandon SturgillBusiness Member
Real Estate Broker · Columbus, OH · Member since 2013 · 3k+ posts · 1k+ votesWhat % Do You Use for Expenses & Vacancy on a Rental Property?
Most Popular Reply
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
11yOriginally 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...
51 Replies
- 11yRoy N.Pro MemberRental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
Originally posted by @J Scott:
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.
It is different that cash! If I use my LoC to cover major CAPEx, I'm paying prime (3%) on that money when I draw down. If I have cash reserves sitting in a money market fund, I'm earning a measly 2.5% until I need it.
The elephant between the two approaches is opportunity cost. If I take the cash earning 2.5% and buy another property which returns 12.5% CoC, I'm ahead by 10%. If the roof on one of our buildings then needs to be replaced - and so happens to cost the same as the downpayment on which I just spent my cash - I now have to dip into the LoC and wind-up and paying 3% on the roof ... but I'm still coming out ahead by 7%
- Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes11y
Originally posted by @Roy N.:
It is different that cash! If I use my LoC to cover major CAPEx, I'm paying prime (3%) on that money when I draw down. If I have cash reserves sitting in a money market fund, I'm earning a measly 2.5% until I need it.He only uses the LOC to pay the capex AFTER he used his cash reserves to pay down the LOC. It's exactly the same thing as using cash, except that he was able to avoid some interest on the LOC for the period of time the cash reserves had paid down some of the principal.
I'm not sure if we're agreeing or disagreeing... :)
- Investor · Fair Lawn, NJ · Member since 2014 · 384 posts · 189 votes11y
thank you @J Scott
What I meant was if there is one market where a 100k house rents for 1k a month and another market where a 100k house rents for 2k a month (similar houses) then all of these rules become even more subjective than they already are.
My feeling is that it all comes down to experience and I am running into the limit of what I can learn from other people on this without going full montey.
@Arlan Potter You're right, this game isn't for everyone and I am still all talk. On the other hand I went from near complete ignorance but 2 months ago to being able to define my criterea, analyze deals, find sources for deals and having my financing sorted. I gave myself 6 months to buy my first place. 3.5 months to go before I know if I'm full of it or not.
- Real Estate Broker · Mount Olive, IL · Member since 2013 · 1k+ posts · 310 votes11y
Welcome to BP.
You will always need to allocate funds for
Vacancy (usually 10%)
Reserves (usually $300 - $500 per unit)
Maintenance & Repairs (usually 5%, if property more than 20 years old 10%)
If you don't allocate these funds, you will have a bad surprise sometime.
Hope it helps.
- Investor · Wichita Falls, TX · Member since 2010 · 3k+ posts · 603 votes11y
@Brandon Sturgill In my analysis of a property I like to use:
- 8.3% for Vacancy
- 10% for Repairs & Capex - Though I may likely start using 15% total
- 10% Property Mangement
- Actuals for Property Tax, Insurance, and other fees (water/sewer if paid by owner, lawn care/snow removal, gutter cleaning, etc.)
Vacancy rates will differ by location. Repairs & Capex will differ by age of property etc. Be familiar with what you're buying and where!
- Investor/Accountant/Builder · Meno, OK · Member since 2014 · 1k+ posts · 918 votes11y
This was a great thread. A bunch of good advice.
Thanks to all.
- Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes11y
Originally posted by @Bram Spiero:
What I meant was if there is one market where a 100k house rents for 1k a month and another market where a 100k house rents for 2k a month (similar houses) then all of these rules become even more subjective than they already are.
While not always the case, if in one market a similar house rents for double what it would rent for in another market, then it's likely that the higher-rent market also has a higher cost of living -- which means higher labor and material costs for construction services.
In other words, replacing the roof in the market where the rent is $2K is likely more expensive than replacing the same roof in the market where the rent is $1K.
- Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes11y
Interesting thread. I never knew you could have -0- vacancy and -0- expenses. I must be doing some wrong:)
I estimate 10% vacancy
I estimate 5% capex
I don't estimate management because I self manage
I estimate 10% maintenance
Taxes and insurance are expensive in my market. Almost 30%.
So far my costs have been within this range. Vacancy has been almost non-existant due to our strong rental market and being able to retain tenants. Capex has been less than 5% -closer to 3% actual out of pocket on some or the properties. Reserves are VERY important. I recently had 3 central A/C units installed using reserves (this is a lot easier than not having it and trying to come up with money out of thin air). - Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes11y
@Brandon Sturgill - thanks for visiting me in Lima, and thanks for the card, you class act you! Sorry for such a crazy day :)
Good for you to recognize that there is maintenance, and then there is CapEx. Both are a function of your building, while the vacancy is a function of the marketplace. Since you are a stone's throw away from me, the safe vacancy factor now days would be 10% - perhaps you can get away with 7.5% in your sub-market. Maintenance is a function of the mechanicals and tenant base - but certainly no less than 5%-10%. CapEx on a well put together building without boiler and flat roof is somewhere in the $350-500, depending on the size of the building.
All of this is approximate, of course :)
Good Luck!
- Investor · Fair Lawn, NJ · Member since 2014 · 384 posts · 189 votes11y
@Ben Leybovich is that 350-500 per month per unit or is that the reserves?
- Real Estate Broker · Columbus, OH · Member since 2013 · 3k+ posts · 1k+ votes11y
No worries @Ben Leybovich it was a great first date...and I think if I can start to underwrite like Brian Burke I can't go wrong...The transition from rehab to buy-and-hold has been difficult but fun. I actually ran across my first potential 2% deal at the end of last week...just wanted some further guidance before pulling the trigger.
Thanks, Ben.
- Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes11y
@Bram Spiero - that's per year, and the smaller the building the higher this number. 100 units without boiler or flat roof in reasonable condition should be fine at $350/door per year. In small multi there's no saying - could be as high as $5,000/door in a duplex - you know? I bought a 10-unit 2 years ago. The first year I spent about 20k on CapEx. This year I still spent about 9k on CapEx. I expect stabilized CapEx on the building to be about $400 plus or minus.
The thing to note here is that all of the CapEx in the second year was able to come out of the Cash Flow. However, in the first year, I had to lean on my reserves at first, and eventually get reimbursed. But, I did need those reserves to get the ball rolling.
@Brandon Sturgill - I've been studying hard @Brian Burke 's underwriting methodology, and after 9 months I feel I am finally beginning to see past the numbers. The numbers tell a story, and it takes a lot of perspective, which only comes out of extensive experience, to visualize the story behind the numbers. Keep at it :)
- Investor · Boyd, TX · Member since 2014 · 688 posts · 467 votes11y
Question on accounting for these reserve funds. If you have multiple SFR properties do you just have a single reserve fund and each month add a certain percentage of rents from all properties into it or do you try to keep separate virtual or physical accounts for each property? This is assuming no LLC holdings, partnerships, etc that would require their own bank accounts.
When I just had two I kept a single physical checking account with two virtual ones in YNAB making sure I had at least $3000 in the account in case I needed to replace a HVAC. Now I am at five SFRs now but plan to get to twenty or thirty in a couple years so I want to start getting things better organized. The lots of reserves vs. buying properties discussion is really hitting home since I have a great FT salary for the next 2-4 years, but then will be scrambling.
- Residential Real Estate Agent · Cookeville, TN · Member since 2013 · 1k+ posts · 948 votes11y
Hmmm. Looks like most everyone still comes up to about 50% total. In my market, the taxes and insurance are fairly low, so they are maybe only 10% or so combined. I pay a bit more than 10% on management since my PM offers rent collection by credit/debit card, and passes on the extra expense to me (but, we get better results on actual collection rates).
Vacancy - 10%
Management - 12%
Taxes and Insurance - 10%
CapEx - 5%
Maintenance/Repairs - 10%
47% total (just call it 50%)
- Omaha, NE · Member since 2014 · 201 posts · 85 votes11y
"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. "Originally posted by @Arlan Potter:
Most focus too much on the negatives, and analyzing deals to death, and never buy any rentals."
............ this is the most backwards advice i think ive seen yet.
Vacancy approaches zero over time!!!??? repair costs over time approach 0% over time!!!!?????
and you say people analyze too much? LOL!
can someone please direct me to the tenents who live forever, oh yeah and i will need a house that repairs itself please.
- Investor/Accountant/Builder · Meno, OK · Member since 2014 · 1k+ posts · 918 votes11y
Originally posted by @Account Closed:
"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. "Originally posted by @Arlan Potter:
Most focus too much on the negatives, and analyzing deals to death, and never buy any rentals."
............ this is the most backwards advice i think ive seen yet.
Vacancy approaches zero over time!!!??? repair costs over time approach 0% over time!!!!?????
and you say people analyze too much? LOL!
can someone please direct me to the tenents who live forever, oh yeah and i will need a house that repairs itself please.
Isaac,
Do you own 60+ rentals personally? If not, don't call my advice "backward". Did you read all my advice on this thread? If not, don't call my advice "backward".
I never said that vacancy % was zero. I said it approached zero. If it didn't approach zero then I would not own rental property in that area.(like Detroit)
For example if I buy a house and in the first year a tenant moves out and it takes a month to get another then my vacancy percentage is 8.333%. If I rent the same house for the next 7 years to one tenant and then they move out and it takes a month to get the next tenant in then my total vacancy percentage is 2.38%. Now in my naïve mind, I say that my vacancy percentage is approaching ZERO.
Isaac, go out and buy yourself a rental empire. Use whatever metrics you want.
I just like to tell people to focus on the rent/cost % first, and not so much worry about broken toilets. Most people never get into the game anyway so my advice may not be worth much.
No worries. If you are ever in Oklahoma come see me. I'll show you some cheap rent houses.
PS - How does the Big Red let someone run for 408 yards against them? Ouch.
- Investor · Baltimore, MD · Member since 2014 · 163 posts · 51 votes11y
Over what period of time did you acquire your 60+ rentals? What was/is your job at the time when you first started out? When you were first starting out did you build up cash reserves or just have a nice home with a decent HELOC that you could draw against?
I would assume from the OP that he is just starting out in the rental side of things and doesn't have the huge reantal income you have coming in which you can just draw from.
- Investor/Accountant/Builder · Meno, OK · Member since 2014 · 1k+ posts · 918 votes11y
Originally posted by @Alexander Merritt:
Over what period of time did you acquire your 60+ rentals? What was/is your job at the time when you first started out? When you were first starting out did you build up cash reserves or just have a nice home with a decent HELOC that you could draw against?
I would assume from the OP that he is just starting out in the rental side of things and doesn't have the huge reantal income you have coming in which you can just draw from.
12 years
I am an accountant by trade, retired in 2005. Construction work since I was a kid. I now build one new spec house per year, and help my nephew run a motorcycle shop. My wife does the books.
I bought the first three rentals for cash and then used 3 HELOCs to start buying more. Used credit cards, whatever I had to fix them up.
It doesn't matter if it is his first rental, buy a cheap house and build on that. He has to start somewhere. If he waits until he thinks that every possible scenario is perfect, he will probably never buy investment property.
I never planned on being a Landlord, I am a CPA. It sort of just happened one day and once I got the taste of owning rental property, I just kept buying.
What is the secret to 60+ rentals in 12 years? Cheap Houses
And probably -poor renters, in the lower class part of town that most people would not associate with.
My mission is to give them a good quality home at a fair rent amount.
- Omaha, NE · Member since 2014 · 201 posts · 85 votes11y
Originally posted by @Arlan Potter:
Originally posted by @Account Closed:
"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. "Originally posted by @Arlan Potter:
Most focus too much on the negatives, and analyzing deals to death, and never buy any rentals."
............ this is the most backwards advice i think ive seen yet.
Vacancy approaches zero over time!!!??? repair costs over time approach 0% over time!!!!?????
and you say people analyze too much? LOL!
can someone please direct me to the tenents who live forever, oh yeah and i will need a house that repairs itself please.
Isaac,
Do you own 60+ rentals personally? If not, don't call my advice "backward". Did you read all my advice on this thread? If not, don't call my advice "backward".
I never said that vacancy % was zero. I said it approached zero. If it didn't approach zero then I would not own rental property in that area.(like Detroit)
For example if I buy a house and in the first year a tenant moves out and it takes a month to get another then my vacancy percentage is 8.333%. If I rent the same house for the next 7 years to one tenant and then they move out and it takes a month to get the next tenant in then my total vacancy percentage is 2.38%. Now in my naïve mind, I say that my vacancy percentage is approaching ZERO.
Isaac, go out and buy yourself a rental empire. Use whatever metrics you want.
I just like to tell people to focus on the rent/cost % first, and not so much worry about broken toilets. Most people never get into the game anyway so my advice may not be worth much.
No worries. If you are ever in Oklahoma come see me. I'll show you some cheap rent houses.
PS - How does the Big Red let someone run for 408 yards against them? Ouch.
Technically it NEVER approaches zero. it may approach 2 or 3 percent maybe even 1% in the short term however unlikely, but zero is physically impossible. Similarly 0% repairs is also physically impossible. so it never approaches zero in any circumstance.
Regardless of how you approach it. telling people that is dangerous to others. And if someone didnt to the "analyzing" that you criticize and simply purchased a property focusing on rent/cost that would be a sure fire way to end up in bankruptcy.
there are plenty of houses out there, even in my area which you can by with a great "cost/rent" ratio, they are still TERRIBLE deals. There are houses in my area on the MLS for under $10k all the time, doesn't make them a good investment. And to say that repairs approach Zero, is simply false. I don't need to reference the substantial amount of information there is out there, and on this site alone, to point out how blatantly false that is.
- Investor/Accountant/Builder · Meno, OK · Member since 2014 · 1k+ posts · 918 votes11y
Isaac,
I am sorry for bothering you.
PS you didn't answer my question about the Corn Huskers defense.
- Investor · Pawleys Island, SC · Member since 2008 · 1k+ posts · 837 votes11y
You are looking at the 50% rule backwards. The 50% rule is a screening tool for a property you are planning to acquire, not a rule for a property you already own. Essentially, you are using 50% of gross rental income to estimate your overhead costs when you don't know the real expense numbers.
Here is how you should apply the 50% rule. Let's say you are considering a property for your rental portfolio that has a market rent of $1000 per month. Now if you allocate the first $500 of your rental income to overhead, you only have $500 left to pay the debt service. If $500 will cover at least 1.25 times the debt service, then you might want to look more closely at the true costs of this property. If 125% of your debt service is more than $500, then the property is too expensive. Move on to the next candidate.
On the other hand, if 50% of rental income will pay 125% of your mortgage payment (principal and interest only). then you may want to do a detailed cash flow analysis to see if 50% of gross rent will pay all the expenses of ownership and rental operation.
If either half of the 50% rule fails, then the property is too expensive to own or costs to much to buy and will most likely become a negative cash flow property.
- Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes11y
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...
For example, My personal residence 1BR plus rental studio over the last 3+ years that I've owned them, 0% vacancy, $0.00 in repairs. I can see this being more true for condos as opposed to SFHs.
- Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes11y
Originally posted by @Andrey Yusupov:
For example, My personal residence 1BR plus rental studio over the last 3+ years that I've owned them, 0% vacancy, $0.00 in repairs. I can see this being more true for condos as opposed to SFHs.
This is a common mistake that new investor make -- they assume that the short term data will extrapolate long-term. Unfortunately, that's not the case...
The longer you own the unit, the more your deferred maintenance and capex costs will increase. This is because materials wear out over time. Trust me, you'll eventually need to replace the roof; you'll eventually need to replace the HVAC system; you'll eventually need to replace the water heater; you'll eventually need to replace the toilets, carpet, countertops, paint, light fixtures, doors, windows, etc.
Now, some new investors think to themselves, "I'll sell before I have to make all those high-dollar repairs!" The problem is, by not making these repairs, you've deferred the costs, and when you go to sell, the value of the property will be decreased by the deferred costs. There's not way to "cheat the system" when it comes to maintenance and capex.
Also, you may think that because your condo association pays for some of this stuff, you're getting a free ride. But, you think they are getting these things for free? Of course not. You're paying monthly condo dues to pay for all your costs -- but instead of paying them in lump sums when you make the repairs, you just amortize them with monthly payments.
As for vacancy, congrats on three years without one! But, if you own the property long enough and/or own several properties, you'll find that you eventually have evictions, missed payments, turnover periods, etc. One eviction every 15 years that takes 3 months to complete is 2% vacancy right there.
So, while you may think 3 years worth of data is meaningful, it's not. It's meaningless in terms of your long-term expense ratio, which is really all that matters when you're a buy-and-hold investor.
- Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes11y
I assume 2 months of rent every 18 months. Thats because any property turn takes at least one month to turn and then I pay the PM one months rent to lease it. I also assume some cost of repair over the deposit ($300-$500). I have some properties on 2 year leases and others on 1 year. Assuming all turn at the end of the lease I get the 18 month average. If I am lucky, I get some percent to re-sign a new lease but for modeling I like the above.
- Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes11y
Thanks for taking the time to write that. That's precisely why I'm here.
Do you have any tool (excel-based maybe?) that would help me keep track of such expenses, that way I will have a more accurate idea. Unfortunately, my science/medicine background taught me zero about excel, so I wouldn't even know where to start.
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