10% Vacancy, 10% Cap Ex, 10% Management, 10% Repairs?

Question

10% vacancy, 10% cap ex, 10% management, 10% repairs

On all of my practice analyses, this is what I choose. Any suggestions or comments?

David Faulkner · Answer

Just assume you will end up with a 10% return ... no need to do any more analysis beyond that. Probably about as accurate as the analysis you are currently running.

Vacancy varies by market and neighborhood ... any good PM could tell you the vacancy rate down to the block, but most PMs are not good.

Management varies by PM ... ask around. Be sure to include ALL of the fees, not just the management fee, but also lease fees, repair markups, re-lease fees, etc. etc. Typical for me has been 8% management fee, but around 15% effective rate all in after all the other fees are added in.

CapEx has nothing to do at all with gross rent, so no % should be used there. When the roof goes out, the roofer doesn't first ask you what the place rents for before he calculates the bid for the work. Estimate it the same way the roofer would ... material cost + labor hours* labor rate to replace/usable life, added up for each and everything that needs to be replaced over time. It therefore varies based on the size, amenities, and systems of the property. It does not matter if it is new construction either, new stuff still wears out at the same rate as old stuff and will eventually need to be replaced if you hold long enough ... what changes in this case is the initial size of your capex reserve fund, but the capex expense that you set aside every month to go into the reserve fund is the same. In all likelyhood, unless you are investing in super high end properties and/or markets where rents are high, then 10% will be WAY too low ... to give some idea (don't use this number blindly without instead going through the analysis described above) I'm regularly coming up with around $250/mo capex for a typical 3/2 SFR ... in my case they do indeed rent for more than $2,500/mo so 10% would be an overestimate, but this is not the case in most markets, probably including Atlanta.

Repairs is minor, since most stuff will be covered under a real and accurate capex estimate. 5% is probably ok.

Dominic Balconi · Answer

My first investment is going to be a brand new home. What would you recommend % wise in that scenario? I likely won't be holding it long term, it will be a build and sell.

Bettina F. · Answer

Our experience has been a LOT more in repairs during the first two years of owing a building.  After then, repairs settle down.