What percent are you using for maintenance, vacancy, PM, etc???
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Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
11yI 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.
Second City Real Estate4.821 Reviews
130 Replies
Keep going. You will be sitting very well in the future.
Thank you!!
My wife and I live on the lower income of the two and we save and invest the higher income and over the years real estate has become the higher income and we reinvest everything we make from real estate back into more real estate. We don't drive the most expensive car we can afford or live in the most expensive house we can afford. We invest sensibly and stay disciplined. This strategy has worked very well for us.
It helps that my wife has a well paying job :)
My wife and I do the same thing. We have lived on a lot less per month then we actually make. I heavily invested in the stock market for 20 years. I decided after taxes last year there was a better place to put my cash. I'm leveraging for now, but will be snowballing all the mortgages in the next couple of years. interest rates are too cheap for me to not leverage right now, but debt free is always the best way. People who have become accustomed to debt, do not understand the freedom that is felt when you are not paying the bank. Keep it up!
- Investor · Chattanooga, TN · Member since 2012 · 227 posts · 114 votes11y
Gee - using the 50% rule is just so ez plus if you are under 50% in costs, you win! the 50 percent rule covers PM, vacancy, maintenance, taxes, insurance all your expenses-so if it pencils with that - than your golden. not PI.
Originally posted by @Ndy Onyido:
If your plan is to have all cash and buy all cash, good luck. For me, if you take leverage out of REI, you might as well start selling tomatoes and vegetables!. Even Warren Buffet never pays more than 15% down for his investments.
Why would anyone want to buy ALL cash? Even if I have all the money in the world, I will give it to charity and refinance my properties. I do not see the sense of buying property for investment all cash..
NA Onyido I would like to be able to buy cash, so I can pick up distressed proeprties without having to get a loan or hard money. I can then refinance them for a higher value and reinvest that money.
As a new investor I'm torn between two thoughts. One pay cash and take more time to build up a portfolio to make more money with less properties. Or two leverage each property to build it faster but with more properties witch equals more maintenance and repairs.
It's not an easy decision. I would recommend leveraging at least 1-3 properties. This way you can get started in the business and learning as you go. After you've started, then decide to continue leveraging or pay cash as you acquire more properties. Pick a target monthly income (assume mortgages paid off) you want and that's how many to buy. Less is more sometimes....
- Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes11y
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?
Aaron - I was just involved in another thread around the calculator in which I voiced some concerns exemplified in your post...
You need to understand that all of these metrics are either market-driven, or asset driven. They are different for every transaction. For instance:
Vacancy - it doesn't matter what you think; what does the market reflect?
Repairs - this is a function of age of building and rental price-point...
CapEx - function of age, condition, and mechanical set-up of the building
Management - function of size and complexity of the project
You see - it's not possible to blindly allocate these numbers, and using the calculator before you've analyzed the location and the building is putting the horse before the cart...Answer the questions above, and then plug the appropriate numbers into the calculator...
Hope this helps!
- 11yDawn AnastasiPro MemberRental Property Investor · Milwaukee, WI · Member since 2013 · 6k+ posts · 4k+ votes
Originally posted by @Sharad M.:
I will tell you my reasons for buying properties all cash. PEACE OF MIND.I am 32 years old and I have bought enough properties free and clear that I can retire right now, not do anything more and will have a very comfortable and stress free life.
You don't have to leverage your properties to be able to give money to charity. I own my properties all cash and still find money to give to charity.
I also like having some of my properties purchased all cash. If something were to be vacant for 3 months I wouldn't be sweating bullets having to pay out mortgage payments and depleting my emergency fund.
So I have some properties with mortgages, some free and clear, and I also give to charity every year. :)
- Flipper/Rehabber · Greeley, CO · Member since 2013 · 2k+ posts · 1k+ votes11y
@Sharad M. You are right on that you have to account for vacancies and maintenance. Too many investors assume the cash flow is rent minus mortgage and get a rude awakening when they have repairs, vacancies and other costs that make them end up losing money.
@Joe Villeneuve sounds like he ignores cap ex, maintenance and vacancy in order to make his returns look higher than they really are. Sure the cash out from a refinance may cover expenses, but how do you figure your actual returns? Cash on cash return is a huge indicator of what your returns are for many investors. You can't accurately figure returns if you assume a large chunk of cash will cover expenses, but don't actually take the time to figure those expenses or account for them.
Usually you see expenses like vacancy, maintenance and cap ex ignored by people who are trying to sell properties and paint a better picture than reality. Some turn-keys, blogs and gurus use this technique to draw in new investors who don't understand the true costs yet.
- Real Estate Investor · Longview, TX · Member since 2015 · 122 posts · 62 votes11y
Great post, great discussion!
@Andy Mink You and I are of the same opinion. I like your motto "Make as much as you can, spend as little as you have to." That rings very true to my approach to real estate investing. I look forward to seeing you on BP!
- 11yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @Mark Ferguson:
@Joe Villeneuve sounds like he ignores cap ex, maintenance and vacancy in order to make his returns look higher than they really are. Sure the cash out from a refinance may cover expenses, but how do you figure your actual returns? Cash on cash return is a huge indicator of what your returns are for many investors. You can't accurately figure returns if you assume a large chunk of cash will cover expenses, but don't actually take the time to figure those expenses or account for them.
Mark, you probably should have read all of my posts or you would not have said the above.
- Investor · Fremont, CA · Member since 2014 · 10 posts · 4 votes11y
I'm having a really hard time reading all of the people here that are knocking @Joe Villeneuve for his method. I thought this was a group that wanted to help one another, not aggressively go after someone for seeing things in a different way.
He said that $300/mo is his magic number and if that makes sense for him why would anyone else think they can doubt him for something that's working for him. I understand questioning it and that could be helpful, it's the aggressive nature of some that I have trouble with.
I looked over some of my numbers, which are similar to what's been mentioned here (8.33% Vacancy, 4.17% PM leasing fee (1 every 2 years), and 10% maintenance/capex) and see that these "contingency" funds equal around this $300/month. Maybe I'm wrong, but it says to me that many of us are looking at things very similar, but through different glasses, I guess you could say.
Sorry for the rant, but I get really tired reading the close minded negative comments and felt like saying something today.
- Flipper/Rehabber · Greeley, CO · Member since 2013 · 2k+ posts · 1k+ votes11y
Originally posted by @Max Balesteri:
I'm having a really hard time reading all of the people here that are knocking @Joe Villeneuve for his method. I thought this was a group that wanted to help one another, not aggressively go after someone for seeing things in a different way.
He said that $300/mo is his magic number and if that makes sense for him why would anyone else think they can doubt him for something that's working for him. I understand questioning it and that could be helpful, it's the aggressive nature of some that I have trouble with.
I looked over some of my numbers, which are similar to what's been mentioned here (8.33% Vacancy, 4.17% PM leasing fee (1 every 2 years), and 10% maintenance/capex) and see that these "contingency" funds equal around this $300/month. Maybe I'm wrong, but it says to me that many of us are looking at things very similar, but through different glasses, I guess you could say.
Sorry for the rant, but I get really tired reading the close minded negative comments and felt like saying something today.
We are not knocking Joe, but the method of not using any vacancy or maintenance when calculating returns. I and many investors on here have seen many newbies get burned badly because they thought they had cash flow when they did not. They failed to account for any vacancy or maintenance in the future. We are not knocking Joe, but trying to help others from making the same mistake. You cannot just hope your properties are special and will not have any costs.
- Flipper/Rehabber · Greeley, CO · Member since 2013 · 2k+ posts · 1k+ votes11y
Originally posted by @Joe Villeneuve:
Originally posted by @Mark Ferguson:
@Joe Villeneuve sounds like he ignores cap ex, maintenance and vacancy in order to make his returns look higher than they really are. Sure the cash out from a refinance may cover expenses, but how do you figure your actual returns? Cash on cash return is a huge indicator of what your returns are for many investors. You can't accurately figure returns if you assume a large chunk of cash will cover expenses, but don't actually take the time to figure those expenses or account for them.
Mark, you probably should have read all of my posts or you would not have said the above.
I did read all of your posts and the entire thread. Please tell me where I am off base. Here is your original post which set the tone for the rest of your posts.
"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)."
You are saying that taking out future maintenance and vacancies gives a false negative. However, you do spend money on vacancies and maintenance, everyone does. You have to account for it and come up with some amount of money you spend on these expenses. You have a lot of properties so why don't you average the historic costs you have incurred from maintenance and vacancies?
Then you say taking out 16% ruins the deal the for you, but in the same paragraph that 16% is not actually enough to cover much in the way of expenses! So to me it reads that you are talking yourself into making the deal by not accounting for real costs that will occur. Your own words indicate the costs will actually be even more than what you state would be a "deal ruiner" for you. How does this make any sense at all? It is a manipulation of numbers to make a deal look better than it is.
Thirdly you say accounting for real costs that will occur gives you a false negative. These numbers are not made up to scare people, they are created by experienced investors historic costs on their properties. The worst part about this is the costs are real and occur, you admitted that in the previous paragraph. Yet you state those real costs would make the deal look too bad for you to buy, meaning you have to ignore real costs in order for your deals to make sense on paper. You then state they are good deals. Maybe they are good deals because of the equity you gain from the buying below market, or the cash out refi that gives you cash back. SO state that is why they are good deals and still account for the vacancy and maintenance using the cash back and equity gain as your benefits. I assume $190 CF for you is a good deal based on $9,000 cash back and $30k equity gain, but you are manipulating numbers to make CF higher.
In a later post you said you refinance and use the cash from the refi to pay for cap ex, maintenance and vacancies. Nowhere do you mention what these costs actually will be, which is the heart of this post. just that your $9,000 + should cover it. If I missed where you said what these costs will be specifically please tell me.
For new investors that are not using your strategy and not getting cash back from a refi. They have tight financials and not a lot of extra cash, are they to account nothing for vacancies and maintenance as well? This is my entire point.
As an alternate take, I'm reading a healthy and informative discussion about various investment and accounting styles. I just account and interpret for different communication styles (aggressive, laid back, accusatory, ultra-affirmative, etc) and harvest the facts and ideas.
Currently my takeaway is similar to others - there's more than one way to analyze and execute a deal. I'm still in awe of those of you who find deals with ARVs of twice what you're putting into it in purchase and renovation.
Important point, how bout we expand the OP's question past purchase analysis and accounting style, into the disposition stage. What percentages and/or amounts do you disclose when selling your properties? Do you paint the rosy picture and let the buyer be responsible for due diligence to find the true value of the property? Or do you help them out by disclosing two years of tax returns, repairs, age of appliances, roof & HVAC, late rent, etc? Is hiding (when legal and/or when you think you can get away with it) the ugly stuff a legitimate way to increase one's bottom line?
- Investor · Fremont, CA · Member since 2014 · 10 posts · 4 votes11y
Originally posted by @Mark Ferguson:
Originally posted by @Max Balesteri:
I'm having a really hard time reading all of the people here that are knocking @Joe Villeneuve for his method. I thought this was a group that wanted to help one another, not aggressively go after someone for seeing things in a different way.
He said that $300/mo is his magic number and if that makes sense for him why would anyone else think they can doubt him for something that's working for him. I understand questioning it and that could be helpful, it's the aggressive nature of some that I have trouble with.
I looked over some of my numbers, which are similar to what's been mentioned here (8.33% Vacancy, 4.17% PM leasing fee (1 every 2 years), and 10% maintenance/capex) and see that these "contingency" funds equal around this $300/month. Maybe I'm wrong, but it says to me that many of us are looking at things very similar, but through different glasses, I guess you could say.
Sorry for the rant, but I get really tired reading the close minded negative comments and felt like saying something today.
We are not knocking Joe, but the method of not using any vacancy or maintenance when calculating returns. I and many investors on here have seen many newbies get burned badly because they thought they had cash flow when they did not. They failed to account for any vacancy or maintenance in the future. We are not knocking Joe, but trying to help others from making the same mistake. You cannot just hope your properties are special and will not have any costs.
I hear you there Mark, it just sounds like some aren't reading it all before commenting. To me when someone has a magic number like $300 they clearly have more figured in. I mean you can't bank on getting that kind of "net" return, fully leverage at least. Now it might not be the same way you look at your deals, or maybe even the majority on here do, but it's "a way" and it could help others as long as the whole story remains in view. Remember that people use different methods to get to the same/similar results.
I personally like what @AnishTolia mentioned using percentages looses something when you compare properties ranging from $700-$3000. An investor needs to know all the details about what they're evaluating. This also ties into why so many people determine a particular niche and become experts in it. When you know your particular model well enough you'll be able to adjust your percentages or $ amount to suit it.
I'm just saying that it's incredibly important to make sure people know that the $300 figure is part of what Joe's talking about. You can't make a comment about part of what was said and just ignore such a major component, as some have. New investors reading this might think that he's just using PITI and a small PM fee. That's where people go terribly wrong.
- 11yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Simple answer Mark. 2 + 2 = 4
Need that explained too. Ok, here it is. It all comes down to simple math.
If I take out 16% of $1000/month, I'm doing two things:
1 - I'm accumulating a grand total of $1,920 in year one @ $160/month. Right?
1a - In year 2 = $3,840; year 3 = $5,760; 4 = $7,680; 5 = $9,600.
1b - As you noticed, and read, but didn't sink in, is when I refinance in 6 months, I'm banking proactively about $9,000 in one shot.
1c - It would take me 5 years to accumulate only $600 more your way, than I can have in 6 months my way.Now, which one of these two options is better?
...and...,
2 - By taking the 16% out of my cash flow unnecessarily, I turned a good property into a bad one, and a missed opportunity.
- Investor · Fremont, CA · Member since 2014 · 10 posts · 4 votes11y
Originally posted by @Kevin E.:
As an alternate take, I'm reading a healthy and informative discussion about various investment and accounting styles. I just account and interpret for different communication styles (aggressive, laid back, accusatory, ultra-affirmative, etc) and harvest the facts and ideas.
Currently my takeaway is similar to others - there's more than one way to analyze and execute a deal. I'm still in awe of those of you who find deals with ARVs of twice what you're putting into it in purchase and renovation.
Important point, how bout we expand the OP's question past purchase analysis and accounting style, into the disposition stage. What percentages and/or amounts do you disclose when selling your properties? Do you paint the rosy picture and let the buyer be responsible for due diligence to find the true value of the property? Or do you help them out by disclosing two years of tax returns, repairs, age of appliances, roof & HVAC, late rent, etc? Is hiding (when legal and/or when you think you can get away with it) the ugly stuff a legitimate way to increase one's bottom line?
I'm a firm believer that the buyer should thoroughly do their own due diligence. This is their responsibility since it's their investment and no one else. The sellers can, and do, market your properties to sell them. Hopefully legally and morally too, but as a buyer I do what I can to find out for myself. Any buyer should expect the seller to tell them a lot about the good and brush right by the bad. That's my approach to buying, as for selling I personally would disclose anything I know. Keeping it to the basics though, I always feel that someone is trying too hard to sell me on something when I get too much info myself and that kind of sales pitch isn't my thing. Just give true hard facts and be open about variables for them to consider in any way they're comfortable with. It's important to me that everyone feels good about the deal and I'll try to be helpful, but make no promises. Once again, it is ultimately the buyers responsibility to handle their due diligence and I likely won't know everything myself. Acting as if you do is just asking for trouble.
- Flipper/Rehabber · Greeley, CO · Member since 2013 · 2k+ posts · 1k+ votes11y
Originally posted by @Joe Villeneuve:
Simple answer Mark. 2 + 2 = 4
Need that explained too. Ok, here it is. It all comes down to simple math.
If I take out 16% of $1000/month, I'm doing two things:
1 - I'm accumulating a grand total of $1,920 in year one @ $160/month. Right?
1a - In year 2 = $3,840; year 3 = $5,760; 4 = $7,680; 5 = $9,600.
1b - As you noticed, and read, but didn't sink in, is when I refinance in 6 months, I'm banking proactively about $9,000 in one shot.
1c - It would take me 5 years to accumulate only $600 more your way, than I can have in 6 months my way.Now, which one of these two options is better?
...and...,
2 - By taking the 16% out of my cash flow unnecessarily, I turned a good property into a bad one, and a missed opportunity.
Now I am starting to think you didn't read any of my post. lol You can keep insulting me if it makes you feel better, but I have thick skin!
1. The post is about what percent do investors use to account for vacancies and maintenance. My whole point is you claim not to use any percentages or costs, you just assume your cash out refi is enough to cover anything in previous posts.
2. What if your cashout refi is $20,000? does that mean your costs will be $20,000 instead of $9,000 or does that mean your refi will cover costs for 11 years instead of five?
3. What happens after five years? Do your costs stop occurring or do you have to do another cashout refi to cover future costs?
4. For investors who do not do refis how are they to figure cash flow? THis is not about you, it is about teaching other investors how to figure their cash flow.
Any property can appear to be a great rental if you don't ever figure what the costs and expenses are.
- Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes11y
Originally posted by @Joe Villeneuve:
Originally posted by @Sharad M.:
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?
Of course I account for those "fun" expenses. I never said I didn't, and I mentioned that I do it proactively. Here is an example of a property I have control over right now. I'm using this one for no other reason than it's on my computer screen in front of me right now:
Profile: 3 bed/1.5 bath; 1066 sf; bsmt and garage; brick ranch; bank owned.
Cost to Buy = 68k; rehab = 10k; ARV = $125k; 70% ARV (refi) = $87,500; CashOut = $9,500
Rent: =$1350; T/I = $220/m; PM = $130/m; REFI: CF = $640/m; CF = $360/m ($4320/yr)End Result Moving Forward:
Cash Flow = $4,320/year
Equity = $37,500 (30%)
Cash Out from REFI = $9,500 (this is my CAPEX, repairs, etc...)
Cash Back from REFI = $68,000 (this is used for the next deal)...and, then I just repeat this over and over.
I've been wondering for months how your specific rental hustle works. I'm slow to understand some strategies, but I think I finally get it from your example. Your cash flow is your income (so to speak). And your equity is for capex/maintenance/vacancies and new acquisitions. The business model seems to be dependent on buying low and arriving at an ARV that allows a refi sufficient for both your capex fund AND your next cash purchase. Also it's dependent on the availability of cash out refis. History shows that those sometimes go away for awhile.
What happens when you miss your target ARV refi number? If the house in the example only appraises for $115K, what happens then? Do you reduce the capex/maintenance/vacancy fund? Or reduce your cash acquisition by $10K?
I'm intrigued.
- Rental Property Investor · Winslow, ME · Member since 2008 · 826 posts · 281 votes11y
I use:
8% for vacancy for most, 12% if lower class property (to account for eviction expense)
PM 8%
repairs 10% (my actual is about 20%)
capex 5% (my actual is 10% or higher)
My repairs + capex has been 30-40% for years but mostly due to buying old old buildings. This year we're around 10 + 8
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