First time landlord to be. I'm looking to forecast and budget for 1) capital expenses relating to big ticket items (roof, hvac, appliances, unforeseen etc.) and 2) ongoing repair and maintenance costs. I've searched the interweb and all I can seem to find is "budget 1% - 2 % of purchase price/asset value per year for these." That doesn't really cut it for me.
What I'd love is a list of common items I should expect to incur and their respective average cost or estimated cost. For example [AC replacement - $5,000 - 15 yr expected useful life] , [interior paint - $200 - 2-3 yrs or as needed per tenant turnover]. Maybe if someone has a matrix or spreadsheet they would share? Thanks in advance.
The asset will be:
located in Tampa, FL
3/2 | +/- 1200 sq ft (heated)
For making estimates for a new purchase, I simply apply the 50% rule. If you're using a property manager, expenses, capital and vacancy will be 50% of gross market rents over the long term. If you're self managing, you can knock that down by the cost of the PM, so I use 36%. Then, I look for anything that's going to specifically drive that higher.
Its impossible to estimate this to the level of detail you want. An AC may typically last 15 years, but may also fail in some bad way after five or last 20. So, you build up case reserves. At least six months PITI, six months rent is better. Enough to cover the biggest repair you might expect is better still.
The problem with trying to break it down item by item is the temptation to cut her and there and then you're left at an overall number of 20% of gross rents. Looks good on paper, but that won't happen in real life.
Here are some related threads; this is like an FAQ:
J Scotts book will also help on out estimating costs of items and labor. great reference book.
Jon Holdman is right. Nearly impossible to pick and one can argue that any list created is too subjective. Tampa is not too different than any other city when it comes to property expenses. If anything it is less expensive. Seeing as it is a block house I would probably forego the flood insurance (unless you can't).
I also suggest using the 50% rule until you have owned properties for several years and start getting a feel for your actual numbers. There are just so many variables and anything can go wrong at any given time. You may get lucky and run with low expenses for years, but then you may hit a stretch of a few years where it seems like everything breaks or there are a lot of vacancies. I've learned the key to getting through it is have good reserves. It takes discipline to leave a large chunk of cash in the bank, but it will save you when those tough times hit.
From the links Steve provided: http://www.freddiemac.com/singlefamily/forms/sell/...
This is just a thought and not applicable in many scenarios. But I can see where it makes sense (e.g. resort rentals, high service cost areas). I would also say that there are some ways to reduce/eliminate some variability in your expenses. Example: replace systems and appliances (D/W, stove, refrigerator) at acquisition and at EOL per class life of depreciation schedule. My company does not implement this kind of reserve system, but other companies do. Example 2: fleet vehicles - sell at 80,000 or 5 years (MARCS EOL)... or similar type system that minimizes exposure to LT maintenance expenses.
@Brice Hall yes, its not at all obvious this rule of thumb applies to a wide range of rents. Yet, there have been two large data sets offered up here in the past that strongly support that number. Those were actually apartment data for very large numbers of units. Tens or hundreds of thousands. Unfortunately, neither dataset is still available. I only have two rental units, so my results are meaningless. Some years I've had units with no expenses at all, other than taxes and insurance. Other years I've had one expense (sewer line replacement) consume more than 50% of the rents by itself. Actual results for any particular unit in any year may vary widely. Especially on the negative side. Taxes and insurance are the bare minimum. But there is no upper limit.
Banks use the rule of thumb:
net rental income = (75% * rent) - PITI
So, they're assuming your expenses are 25% of rent plus taxes and insurance. I think that assume you're self managing. Management expenses are typically 10% of collected rents plus half a months rent to fill a vacancy. Sometimes more for filling a vacancy. That works out to a total of 14% with one vacancy a year. If you manage yourself, you can earn the PM's cut.
@Jon Holdman great response thanks! Has anyone shared an actual reserves spreadsheet? (Replacement cost / average life)
@Dan Brainard Ive been looking for a similar thing, any luck?
@Steve Babiak , thanks for sharing those links! I've taken a look, but haven't come accrross any actual spreadsheets or data anyone's supplied. Have you?
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