What percent are you using for maintenance, vacancy, PM, etc???

120 Replies

I am using the BP rental calc to evaluate properties for potential rental performance. What numbers is everyone using for their expenses?

I am using:

Vacancy- 6%-8% this gives me one months rent at 8% or just enough to usually cover PITI at 6%

CAPEX- 5% - If i were to have to replace a roof at 15 yrs, $8k roof/ 15 yrs = $533 yr /12months = $44 a month for CAPEX.

Repairs- 5% - for the unknown or unexpected repairs

Property Management- 12% - If I need PM to place and manage a property for me. 

Thoughts?

I think your PM costs are high. I typically factor in 10%. Other than that, that's pretty much what I've been using and seeing other people use.

Originally posted by @Aaron T. :

I am using the BP rental calc to evaluate properties for potential rental performance. What numbers is everyone using for their expenses?

I am using:

Vacancy- 6%-8% this gives me one months rent at 8% or just enough to usually cover PITI at 6%

CAPEX- 5% - If i were to have to replace a roof at 15 yrs, $8k roof/ 15 yrs = $533 yr /12months = $44 a month for CAPEX.

Repairs- 5% - for the unknown or unexpected repairs

Property Management- 12% - If I need PM to place and manage a property for me. 

Thoughts?

 Hi, which calculator are you referring to? I have 2 calculators and I can never tell which is the BP one.

Andrey if you go to the top toolbar to the analyze tab, there is a rental property calc in there. 

Originally posted by @Marc M. :

I think your PM costs are high. I typically factor in 10%. Other than that, that's pretty much what I've been using and seeing other people use.

 most of the property management I have seen in Tampa will charge one months rent to place a tenant and 10% per month to manage the property. 

If i manage myself I can put that back in my pocket to reinvest. 

kind of my thought process.

Yeah, my PM charges 8% (they're great for anyone who has a small multi or SFR in Portland, OR), but 10% is probably more reasonable for analyzing potential properties. But the other assumptions are right on.

I use 10% for PM because that's what I get charged. That's it. I don't take out for anything else since doing so gives the REI a false security, and a false negative on a property. Here's an example:

Property rents for $1000/month, with a cash flow after all expenses including mortgage pmt and PM = $350/month.  My magic number is $300/month, so this is a good deal.

Now, enter the "deal ruiner". I take out 16% for CAPEX, vacancy, etc... = $ 160/month, which = $ 1920/year. Now I ask you...what exactly does an investor hope to cover in the way of CAPEX, repairs and vacancy with a lousy $1920/year? Roof?...Furnace?...HWH?

On top of that false security, it gives me a false negative, as in a CF = $190/month now...& I run away from it, when I should have grabbed it, but I got a false negative on the analysis.

Now, I'm not saying I don't cover this...I do...just in a realistic way (or 2).

I agree with @Joe Villeneuve I self manage and  self-repair my small portfolio so I do not figure for capex and vacancy.  This allows me to maximize cashflow and try to save as much cash as I can in my "house account"  which is just a slush fund for any and all related house/unit expenses.  I figure if there are big problems that cost a lot I can use a credit card to cover it and then use the cash flow to pay it down as needed. If I can make it 12 months with 6 doors cashflowing $250 I should have $18,000 to handle whatever ethier of the two individual properties need, or try to re-up on another property and hold my breath while we are cash poor.  "Make as much as you can, spend as little as you have too" 

@Aaron Trommater My expense estimates are nearly identical to yours. Relative to others, these estimates seem to fall on the conservative side of things (particularly on the 10% for CapEx and Maintenance combined). I also tend to look at older houses, thus, I have to build in a higher maintenance expense estimate than someone looking at houses less than 10 years old. PM's in my area charge 10% plus one month's rent for placing tenants, just like your area. Even if I expect to self-manage, I factor in the PM expense in order to make sure the deal cash flows if I no longer have time to manage the property.

In my own situation, I wouldn't feel comfortable excluding CapEx and maintenance from my analysis. From the comment above, while $1,920/year isn't going to cover any given CapEx within that year, I'm also not expecting to spend that entire amount each year - it's meant as an accrual. I can be sure that if I hold a property 15+ years, I am going to have to replace some combination of roof, furnace, water heater, etc., and averaged over my holding period, it will come close to $1,920/year. To exclude those costs from my analysis would be misleading. That's not to say others don't implicitly factor those costs in by requiring higher expected monthly cash flows, but that's just not what I personally do.

@Joe Villeneuve   @Andy Mink Good discussion. I see your thought process. If you do not statistically account for the repairs and CAPEX in your evaluation, do you just set aside your cash flow to reinvest or put it in savings?

I am accounting the percentage for it which will reduce the number we refer to "cash flow", although that money sits in a bank account accruing month after month....unless of course there is an expense. 

I am not spending my "cash flow" or the expenses, I am building those accounts up, so I can then reinvest. 

@Alex Roehling   I am in Florida, so anything I buy will be 50s and newer. There is a lot of new construction in my areas, so maintenance, in theory should be lower. FL houses are mostly CBS and shingle roof on concrete slabs. 

I am hearing 10% for property management. If i pay first months rent for placement and then 10% perm/m for property management, that comes out to roughly 17% average PM expenses annually. Do you account for placement of tenant in another area?

@Aaron Trommater  I have a separate estimate for tenant turnover, which is where I include the PM placement fee.  I know that when a tenant vacates, there's likely going to be small (hopefully) repairs, such as paint touch-ups, patching holes, replacing carpet, etc.  I factor in $1,500-$3,000 in repairs for each tenant turnover.  I then include one month's rent on top of that, since that's what the PM will take for placing a new tenant (in my area).  I factor tenant turnover separately from maintenance, since it is significantly impacted by your estimate on how frequently your tenants will turn over.

Originally posted by @Aaron T. :

@Joe Villeneuve  @Andy Mink Good discussion. I see your thought process. If you do not statistically account for the repairs and CAPEX in your evaluation, do you just set aside your cash flow to reinvest or put it in savings?

I use my cashflow for the reason I got into REI...for my personal expenses. I refinance my investment properties (all of them), using the cash from the refi to cover my CAPEX (etc...) and the next property. I just keep repeating this.

I believe in being proactive...and not reactive.

Now, enter the "deal ruiner". I take out 16% for CAPEX, vacancy, etc... = $ 160/month, which = $ 1920/year. Now I ask you...what exactly does an investor hope to cover in the way of CAPEX, repairs and vacancy with a lousy $1920/year? Roof?...Furnace?...HWH?

I disagree with @Joe Villeneuve  on not factoring for these numbers in your deal analysis. Not factoring for these numbers will give you a false sense of security that you are doing better than you really are. These expenses are not a matter of if but when. If you own a property long enough, these expenses will happen.

It's better to account for these before you purchase any property than have to learn the hard way that a property needs a new roof, HVAC, HWH every so often..

@Aaron T.  At a minimum, I use 50% rule for all my expenses.

Originally posted by @Sharad M. :
Now, enter the "deal ruiner". I take out 16% for CAPEX, vacancy, etc... = $ 160/month, which = $ 1920/year. Now I ask you...what exactly does an investor hope to cover in the way of CAPEX, repairs and vacancy with a lousy $1920/year? Roof?...Furnace?...HWH?

I disagree with @Joe Villeneuve on not factoring for these numbers in your deal analysis. Not factoring for these numbers will give you a false sense of security that you are doing better than you really are. These expenses are not a matter of if but when. If you own a property long enough, these expenses will happen.

It's better to account for these before you purchase any property than have to learn the hard way that a property needs a new roof, HVAC, HWH every so often..

 Did you actually read what I wrote?

NA Onyido 

No, it does not. If you do a search on BP, you will learn more about the 50% rule.

Now, I'm not saying I don't cover this...I do...just in a realistic way (or 2).

@Joe Villeneuve  

What is your realistic way (or 2)?

We only have 2 properties at the moment (3rd closing Wednesday fingers crossed).  So I do not account capex and repairs on a monthly basis.  We put all the money from rent into one account for all the expenses, and the balance grows as the months go on.  When we get to a higher balance we will use the money to reinvest.

Very similar to you, the money stays there until it is needed.  I think that capex should be evaluated on a year to year basis, based on the whole portfolio's performance.  e.g. 10 properties, 1 needs a roof that year, it cost $15,000, the cap ex for the year was 15$k, or 3% of the gross revenue, etc. etc.  I don't think it make sense to have separate accounts for all of these projected expenses (capex, vacancy, PM, repairs).  What if you have a capex expense of $6000 when you have only $1800 in that properties "capex account"? 

The reality of real estate investing is that when an expense arises, the money needs to come from somewhere to keep the whole portfolio moving forward.  You cant know what is going to pop up, you can only prepare for it so you are ready with cash or credit when it happens.  By having reserves in proportion to the size of your portfolio you can grow safely. 

 Getting overextended will lead to missed payments and lower credit score, or losing properties or tenants, and you can move backwards lightning fast compared to the slow upward crawl that is the buy and hold investment strategy.  I think the biggest assets for a young / new investor are time, patience, and credit.

"Make as much as you can, spend as little as you have to"  Good luck!

@Alex Roehling  How are you factoring in the turnover? Are you assuming once every 1 year, 2 years, etc.? I like your approach but I feel unless you have a good amount of data on actual turnover that plus a 10% R&M and capex budget would make it hard to find properties and put you way over 50%. 

Maybe a better way to say it is that Capex, vacancy, repairs, and PM should be considered when looking at a NEW deal to make sure that the property is a winner. However once you have possession of the property each CAPEX Vacancy repair situation should be handled case by case with a hope for the best approach. Any buy and hold real estate investor needs every drop of cashflow to get into the next deal.

Say you have 5 properties, each property is separated on a spreadsheet with percentages allocated each month for capex, vacancy, and repairs.  5 years later of 100% occupancy, no capex, no repairs.  There is a total of $50,000 in all of these accounts but only $10,000 in your "positive cash flow account".  A great deal comes along for a 4 unit building at a great price,  are you going to use the $60,000 to close the deal or miss out because you have to "save"the money for future capex, vacancy, repairs. 

These numbers are important to consider while analyzing, but basically useless once you are married to the property.

Originally posted by @Sharad M. :

Now, I'm not saying I don't cover this...I do...just in a realistic way (or 2).

@Joe Villeneuve 

What is your realistic way (or 2)?

 Originally posted by @Joe Villeneuve:

I use my cashflow for the reason I got into REI...for my personal expenses. I refinance my investment properties (all of them), using the cash from the refi to cover my CAPEX (etc...) and the next property. I just keep repeating this.

I believe in being proactive...and not reactive.

@Andy Mink   Thanks, the way you explain it makes a lot of sense; we have the same thought process. I was using the percentages to evaluate the property for purchase to see if its a winner, but all my rents go into one account. I pay the expenses from the account and the rest (capex, maintenance, etc..) just stays in the account building up for the next deal or repair. I dont break them done monthly or account for which property has what dollar amount assigned to it. 

I think I will stick with my initial evaluation numbers, as it gets me a good sense of what I will be bringing in for cash flow. 

I also look at the 50% rule as well, but I like a little more finite number.

I dont need the income from rentals for my personnel expenses, I am just trying to build cash flow for the long term. Maybe one day when I dont want to work anymore, I will look at letting cash flow be my job.

@Andy Mink  

This is  a practical strategy. Use what is expedient at the time and leave all the monotony with rules....

@Joe Villeneuve says he uses his cash flow for the very reason why he is in REI-personal cashflow and financial freedom.-period!....use the cashflow to meet cashflow needs and refinance when necessary.

Once we establish a benchmark or threshold for a deal, stick to it when it makes sense. For @Joe Villeneuve , $300 positive cashflow is that benchmark and any deal that meets this mark is good to go!

Sometime we all get caught up in these rules that we tend to lose the essence of why we are in this  business in the fist place..

I do not like complex rules and things that make life unnecsarily difficult....life is too short, enjoy it with few monotonous rules!!!

Cheers!

@Joe Villeneuve  

But you do factor in some amount for repairs, capex, vacancies?

Can you walk through an example of how you analyze and calculate cash flow for your property?

I use:

8% vacancy

8% repair

5% capex

9% management

We have been in crazy growth mode but once summer hits we should be stabilized and done acquiring.  I feel these numbers are conservative and we budget $65k a year for vacancy, repair, and capex.

My plan is to transfer a fixed amount of profit into our personal account each month.  Then capex and any money not spent on vacancy and repair that month goes into a savings account (or if we overspent one month we will pull from the savings account to make up the difference in profit).  At the end of the year what is left we will  plan to spend on bigger proactive projects.  So if a roof will need to be replaced in a year or two we will do it now.  If we have an old furnace instead of waiting for it to die we will replace it now.  

This way we will avoid big ticket surprises and not get comfortable living off extra profit.

Join the Largest Real Estate Investing Community

Basic membership is free, forever.