What percent are you using for maintenance, vacancy, PM, etc???
Most Popular Reply
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
- 11yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
OK. So you want my expenses. Not sure it really matters in this discussion since whatever the cost is, I will have more cash on hand to cover them my way than by building the cash reserve from the monthly cash flow, but here goes:
PM: 10%. Already assumed in the CF analysis
Vacancy rate: About 1 month per year per 5 properties. (I have a great PM)
Roof: Doesn't matter. I always cover this in rehab...and thus is included in the cost, and paid for in the refi. This also means it is guaranteed if I have a problem afterwards.
Furnace & HWH: I lump these together since I pay for them the same way...through my Appliance Repair Program through my utility company. I have a problem with either, I call the Utility Company, they send out a repairman, it's fixed, and the Utility Company pays the bill. Costs $13.95/month...and my tenant pays for it in their utility bill.
- Wholesaler · Holiday, FL · Member since 2013 · 571 posts · 221 votes11yI am a lazy calculater and so tend to use 10% for each of those things. That tends to be generous in total but as any variance goes to the good rather than the bad side of my ledger - it makes me feel better. <g> If the property will cash flow using 10% across the board I end up favorably in the end.
Something else is that I tend towards building a rehab in a fairly bullet-proof way. So thing like roof-life is closer to infinite than it is to 15 years. I would never even consider installing a shingle roof for that reason. I no longer install carpet in rentals. I have found that first class materials and excellent workmanship are the most cost effective approach in the long term.
I recently rented a house to a very nice couple. The woman said to me:
This is the nicest house I've ever seen for rent. I love it here and I hope we never have to move.
Me either. And I'm a very fair guy - just treat the house well and I'll treat you well.
And That - is my kind of tenant. <g>
stephen
-------------------
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?
- Highland, MD · Member since 2015 · 109 posts · 52 votes11y
Originally posted by @Joe Villeneuve:
Furnace & HWH: I lump these together since I pay for them the same way...through my Appliance Repair Program through my utility company. I have a problem with either, I call the Utility Company, they send out a repairman, it's fixed, and the Utility Company pays the bill. Costs $13.95/month...and my tenant pays for it in their utility bill.
Nice nugget of info, thank you !
BP need a nugget bank so we can store things like this.
- 11yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @Kelly R.:
Originally posted by @Joe Villeneuve:
Furnace & HWH: I lump these together since I pay for them the same way...through my Appliance Repair Program through my utility company. I have a problem with either, I call the Utility Company, they send out a repairman, it's fixed, and the Utility Company pays the bill. Costs $13.95/month...and my tenant pays for it in their utility bill.
Nice nugget of info, thank you !
BP need a nugget bank so we can store things like this.
Thanks, but not every Market has a utility company with a program like this. I do know that there are many out there that do though.
- Highland, MD · Member since 2015 · 109 posts · 52 votes11y
Originally posted by @Stephen S.:
I am a lazy calculater and so tend to use 10% for each of those things. That tends to be generous in total but as any variance goes to the good rather than the bad side of my ledger - it makes me feel better. <g> If the property will cash flow using 10% across the board I end up favorably in the end.
Something else is that I tend towards building a rehab in a fairly bullet-proof way. So thing like roof-life is closer to infinite than it is to 15 years. I would never even consider installing a shingle roof for that reason. I no longer install carpet in rentals. I have found that first class materials and excellent workmanship are the most cost effective approach in the long term.
I recently rented a house to a very nice couple. The woman said to me:
This is the nicest house I've ever seen for rent. I love it here and I hope we never have to move.
Me either. And I'm a very fair guy - just treat the house well and I'll treat you well.
And That - is my kind of tenant. <g>
stephen
-------------------In a 10-10-10-10 scenario like this what kind of cash flow are you happy with?
What are you replacing the carpet with? Hardwood?
- Wholesaler · Holiday, FL · Member since 2013 · 571 posts · 221 votes11y
- Investor · Central, NJ · Member since 2013 · 40 posts · 2 votes11y
Great discussion! I learned quite a bit from it, thanks everyone!
- Investor · Baltimore, MD · Member since 2014 · 163 posts · 51 votes11y
@Joe Villeneuve I think you have found a pretty neat strategy. I have a couple of questions if you wouldn't mind.
1) What price range do you normally buy in?
2) How much do you typically spend in rehab?
3) How much does it typically cost you in closing costs for your re-fi?
4) When you were first starting out in RE did you use the same strategy (cash out re-if) you do now? If no, how were you estimating and saving up for expenses?5) How long did it take you to be able to build up enough profit to be able to pay all cash for your deals? I'm thinking most new invesors, myself included, don't have 50K+ to plop down on an investment.5) For the Furnace + HWH: How do you get your tenants to pay for the appliance program? If the utilities are in their name, wouldn't they have to add that to their bill? How does the utility allow renters to cover a landlords property in their bill?
Thanks.
- 11yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @Alexander Merritt:
@Joe Villeneuve I think you have found a pretty neat strategy. I have a couple of questions if you wouldn't mind.
1) What price range do you normally buy in?
2) How much do you typically spend in rehab?
3) How much does it typically cost you in closing costs for your re-fi?
4) When you were first starting out in RE did you use the same strategy (cash out re-if) you do now? If no, how were you estimating and saving up for expenses?5) How long did it take you to be able to build up enough profit to be able to pay all cash for your deals? I'm thinking most new invesors, myself included, don't have 50K+ to plop down on an investment.5) For the Furnace + HWH: How do you get your tenants to pay for the appliance program? If the utilities are in their name, wouldn't they have to add that to their bill? How does the utility allow renters to cover a landlords property in their bill?
Thanks.
Answers:
1) Depends on the market I'm in. There are 3 levels of market. $50k range, between $75-100k, and between $100-120k.
2) Between $500-$15,000. I've gone over this maybe twice yes, on purpose), but that's it. Anything over that means I'm doing something major, which is time consuming, and slowing me down. Gotta keep the cash moving.
3) $350-500...rolled into the loan. Depending on which source I use.
4) No...but, if I knew then what I know now....
5) 5 minutes. The first property I used a cash partner (still do). Actually, that should read partners. How long before I didn't need the partners? Don't know. When I got to that point, I realized that using a partner, and sharing the wealth, was better than keeping it all, and restricting myself by using only my cash.
6) I can do it either way...I pay directly, or they pay on their bill. The utility just wants their money. The cost is $13.95/month, so I add it to the rent. There are different levels to the program. They will also cover the washer/dryer, DW, refrg, oven, A/C, ...for upcharges. Since those items (except the A/C) are usually the tenants own items, by having the base cost already established, the upcharges are the only extra to the tenant. They love this.
- Investor · Pueblo West, CO · Member since 2014 · 310 posts · 213 votes10y
I have a rental house with low taxes, insurance and vacancy which has gotten me into some disagreements about rules vs. reality. I bought a 2200 sq. ft. rental that is 4 bed/2 bath. I might be transforming a bonus room into a 5th bedroom in 2 years. I bought it in 2007 for 182K. It originally rented for 1350/month but now it's up to 1900/month. It is probably worth about 300K right now. The property taxes are currently 1530/year (6.7%) and the insurance is 675/year (2.9%). The vacancy rate has been 0% over the last 8 years because it's a college town and leases are signed 4-6 months in advance. My rent increased but my taxes or insurance did not. Doesn't that mess up the analysis? After 10K of the initial rehab, I average about 1500/year in repairs. It should be lower, but I had to replace some carpet multiple times because I couldn't figure out a broken gutter and had some water problems.
- Investor · NOVA, VA · Member since 2014 · 99 posts · 101 votes10y
In reality Joe Villeneuve's method is no different than an investor paying for CAPEX from a HELOC or credit card. Joe just takes the leverage before the expense occurs and thus guarantees he has cash available and not the ever elusive RE equity. And since he uses his cash flow for living expenses his profit and loss equation is pretty simple too:
(steak:hamburger / days in the month) or even (Balvenie 12 Year:Budweiser / days in the month)
- New York, NY · Member since 2012 · 17 posts · 3 votes9yCorrect me if I'm wrong but aren't repairs considered the smaller minor maintenance whereas CapEx is the larger expenses like replacing appliances, a roof, etc. So with this in mind why is it necessary to set aside the same percentage for each? Shouldn't you be able to set aside a smaller percentage for "repairs"? Also, when calculating expenses, do you guys have a set amount set aside in advance for your vacancies, capex, repairs, etc PLUS your additional 5% 8% 10% or whatever it is that you save each month for these expenses. Or as soon as the property is officially yours you start putting back the set percentages without having a reserve first. Speaking of reserves, what are people referring to when they say reserves. Are they referring to one reserve for all expenses combined or are they just referring to capex? Just vacancies? Appreciate anyone who can provide some insight to me on these things
- Investor · Zürich, Zürich · Member since 2016 · 292 posts · 115 votes9y
@Lathan Cram As some have said here these figures are mainly for analyzing a deal.
Then again, expenses are real so there needs to be money available to pay those bills. Therefore, strictly speaking, you would need to have that cash sitting in an account even before buying the property for which you ran the numbers. Because, in theory, on day 1 after closing the HVAC could die, together with the water heater having a leak, the range no longer working and the carpet having received a beautification from a dropped bucket of pink paint, sprayed all over the place. Your whole spreadsheet calculation of x% for whatever is totally useless at that point since you need the money now to fix what what needs fixing.
So long story short: one should always have reserves to cover (un)expected expenses. Running a spreadsheet with certain percentages for certain expected expenses simply helps you to figure out how much actual money you should set aside for this - after you own the place. But you should have a cushion prior to entering the REI realm.
On another thread someone was asking about buying a $650k building with an annual income of some $35k. Assuming that this person does not have plenty money sitting in a bank account this would probably be a bad idea since that person has no buffer to pay for anything that might occur on day 1 or 2 or 3...
- New York, NY · Member since 2012 · 17 posts · 3 votes9yAndy D. Thanks for the thorough response. So basically If I am understanding you correctly, the reserve fund you have PRIOR to actually purchasing the property is just an overall fund for anything that may happen whether it be minor repairs on day 1 or replacing HVAC 2 weeks after owning the property or the tenant breaks the lease right away for whatever reason. Is that correct? And then additionally, after you officially own the property you start setting aside extra money each month for the different expenses. Where does this money go exactly? Do you have different accounts labeled "vacancy", "repairs", "CapEx, etc" keeping them all separate from each other or does all of the money go in to the one RESERVE account we talked about earlier?
- Investor · Zürich, Zürich · Member since 2016 · 292 posts · 115 votes9y
Originally posted by @Lathan Cram:
Andy D. Thanks for the thorough response.
So basically If I am understanding you correctly, the reserve fund you have PRIOR to actually purchasing the property is just an overall fund for anything that may happen whether it be minor repairs on day 1 or replacing HVAC 2 weeks after owning the property or the tenant breaks the lease right away for whatever reason. Is that correct?
And then additionally, after you officially own the property you start setting aside extra money each month for the different expenses.
Correct. This is how I approach this. Now, since I have owned several properties for many years now this really isn't relevant anymore for me as everything kind of "blends together". I have money set aside, the source having been from various properties. Therefore, when I now go ahead and buy another property I already have funds "for this property set aside" since I have money to spend if push comes to shove.
However, to answer your second part, yes, I then start saving money from that new property to add to the funds in my already existing "money pool" (sounds great, right?? ;-) ), increasing my reserve fund to at least have enough money available to fix whatever might come up on, say 2-3 properties. Would it be sufficient if I had to replace 3 roofs at the same time? Not really, I would have to tap into other funds such as my "next down-payment fund". But if this were to happen, well, then I'd have to replenish that fund asap and hold off on buying something until I am back on track. That's the risk of running a business. Not everybody is an Apple or Google with billions of dollars just sitting there waiting to be spent...
And no, I don't have separate (bank) accounts for the various types of expenses. From a bookeeping point of view one could of course do that but actually having several bank accounts, well, at least I don't see the point in that. So these funds just sit in an account, happily cuddling with each other, waiting to be - no, not spent on expenses but preferably invested to increase my rate of return! :-)
If you have several legal entities then of course you want to have separate bank accounts for each entity but that is a different story which is probably not relevent here.
- New York, NY · Member since 2012 · 17 posts · 3 votes9yAndy D. Thanks for painting the picture for me. I can visualize it much better now. 1 reserve fund that holds the money for all expenses. Some of the funds you have prior and then you set aside a percent for each expense every month. I guess the question then becomes, how much are investors willing to risk regarding what they have in reserves when buying a property. I am happy to learn that it's just one and not a separate account for each different type of expense. Seems that would get a bit tedious especially after acquiring more properties over time.
- Investor · Zürich, Zürich · Member since 2016 · 292 posts · 115 votes9y
Lathan, I'm possibly stating the obvious but - as you seem to be a "newbie" (not a bad thing!) - I shall therefore say this: please bear in mind that this is how I do it. Doesn't mean that there are not other ways of doing it or that others actually think that they are doing it better than I do. It also more likely than not depends on the size of your operation. We have people here who own hundreds of units which is a totally different beast. I use legal entities, so I actually do have seperate accounts for these but the point remains the same as within such an entity I still do not have seperate accounts for Capex, repairs etc.
If you're only getting started: don't overcomplicate things. Do make sure that you have your business income/monies seperated from your personal funds (i.e. you should at least get 1 more bank account next to your non-real-estate personal checking account). Keep proper records of what is going on and try to visualize the numbers by whichever means appeal to you. I use Excel. Others use Quickbooks or any other of those tools out there available online etc. Good luck!
- Greenwood, IN · Member since 2013 · 346 posts · 93 votes9y
Currently. I have been figuring on 10 percent for repairs/maintenance and 10 percent towards capex. Currently, I am using 5 percent for vacancy, since vacancy has been low the last few years.
Then when buying into a deal I shoot for 15-18 percent for taxes/insurance.
I self manage currently so, I expect my long term operating expenses to be around 40-42 percent.
Year in, year out, I have been doing better than that. But haven't had any "huge" capex expenditures really.
- Rental Property Investor · Winslow, ME · Member since 2008 · 826 posts · 281 votes8y
We spend about 25% on capex and repairs annually since 2009, sometimes higher, rarely lower. I just suck at getting things done cheaply. BUT I don't so much as change a lightbulb myself, and we make a great living from our 8 properties / 34 units. Our vacancy has never budged from about 1% since 2009. Our properties are old and we got them inexpensively, (i.e. distressed!) so really to be fair this 25% number is sort of a "multi year renovation". But even so, we spend 10% per month JUST ON SNOW removal sometimes. If I had it to over again, when analyzing prospective properties, I would NEVER budget less than 20% on repairs, maintenance and capex unless it was a brand new building. I don't know how anyone keeps it under 10% unless they do everything themselves and spend all their waking hours looking for deals on parts.
I would always recommend ANYONE to budget for PM even if they self manage. It's crucial. That's the money you're making on your WORK. The cash flow after that is the money you're making on your MONEY. Without factoring in (even an imaginary) 8-10% for PM, it's impossible to compare that investment to another investment like CD's, stocks, bonds, etc. Because with those investments you're not doing any work. If you worked at a bank 40 hours per week and also had money in a CD there, you wouldn't count your wages working as a teller as money earned on your CD. Yet NOT factoring 10% for PM is exactly the same thing. EXACTLY.
- Member since 2018 · 14 posts · 5 votes8y
A percentage of what? The full house value or cash flow?
- Rental Property Investor · Fitchburg, WI · Member since 2016 · 91 posts · 60 votes8y
Originally posted by @Megan Elise McIlvaine:
A percentage of what? The full house value or cash flow?
Hi Megan,
Generally property managers charge a percentage of the monthly rent. They also usually charge a fee (1/2 to 1 full months rent) to place a new tenant, and some also charge a resigning fee, which can vary quite a bit from area to area. As far as the percentage, I've seen numbers ranging from 8-12%.
- Real Estate Agent · San Diego, CA · Member since 2018 · 124 posts · 50 votes7y@Sharad M. What’s the 50% rule??
- 7yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
I use the lowest % I can get away with, since the % of the rent I retain for this has a direct impact on how much the CAPEX repair will actually cost me. In other words, if I retain as low as 5%, a roof replacement may only cost me $2500,... which is much better than if I retained 10% and have to pay $5k for that same roof replacement.
- Member since 2018 · 25 posts · 20 votes7y
Joe, we get it, you're a cowboy and on a steel horse you ride.
People on here tend to get protective, and rightfully so, of potential newbie investors who might misread your response and come away with the dangerous notion that they don't have to be so preoccupied with certain real expenses in a deal they are considering. Even though this would be a misinterpretation on their part, the language and style of your response would also be partially to blame for facilitating the misinterpretation.
Perhaps a more responsible and helpful way to make the same point would sound something like this and elicit no controversy:
""Having been in the business for many years and with several properties under my belt, I have found the following percentages to be relevant to me and my market...
8% vacancy
8% repair
7% capex
10% management
Please understand that your chosen market may and probably does differ, for instance repairs and vacancy may be higher if you're dealing with rougher asset classes, labor costs may be higher in luxury markets, etc. You'll have to dig in a little bit to fine tune those numbers for your market, but for me, that's how those expenses tend to play out over the longer term.
Because I am a rock star investor and never misjudge an ARV and always buy right, I don't budget for these expenses by setting aside the corresponding percentage on a monthly basis, rather I set aside a wad of cash when I refinance. Thus, I am covered for whatever comes up, right up front for at least the next five years. I find this approach to be proactive rather than reactive. If your strategy, market and goals are anything like mine, this may be something to think about.""
For the record, I like your strategy. Doesn't work for me, but it elicited some thought nonetheless.
Join the conversationCreate a free account to reply, vote on answers and follow this thread.