I am searching for a small multifamily property (most likely a duplex) in South Jersey. I am going to look at three properties tomorrow with my agent. I am crunching the numbers and determining at what price these deals make sense. While these particular deals do not make sense unless there is a 20-30% discount, I am wondering if you all estimate different expenses for small multifamily properties any different than SFRs. I understand that this depends on the location and condition of the properties, but I am looking for general advice and insight as to the numbers you all use.
I have seen BP users use anywhere from 5-10% for vacancy, repairs, and capex. I am using 8% for each to be conservative. What do you all use for small multis? Because gross income is higher for small multis, that 24% really adds up. I was thinking that for small multis, some of the major expenses are under one roof and spread out across units (roof, HVAC, water heaters, etc.) compared to SFRs. So, is it necessary to budget as high as 24% for vacancy, repairs, and capex when each unit does not have its own roof, HVAC, etc.?
Thanks for your input.
Hey Ian, it is always best to use those reserves to protect yourself from any future problems. Each category is a form of insurance to cover random malfunctions or property hiccups. I do 5% repairs, 5% vacancy, 10% Management, and 5% capex. This is to help beginners save a good amount of reserves and start off investing conservatively.
@Ian Livaich To add to @Ryan Short ' comment though...this is also going to heavily depend on where you are investing. If you are in a while collar area where people take care of things and don't move every year and evictions are low...his numbers are probably great. Investing in properties like I do which were built between 1880 and 1940 and I have tenets with hourly income, more blue collar work, section 8 rents, they tend to have some more issues paying bills and can be more transient. Therefore I anticipate my expenses will be higher due to the age of my properties and the types of tenets I know I'm dealing with. I'm at 8-9% for each repairs, vacancy and capex, and then my property management is 9%.
It also depends on where in the country you are. If your rents are only $700 a month...you might need a higher percentage of 10% for each category. If your rents are SF/NYC/LA kind of rents (2-4k) than 4-5% might be more than enough.
@Ian Livaich You are over complicating and over calculating. If it is a good deal, buy it. If it is not a good deal, make it a good deal by putting terms into your offer. In this market, you are not likely to get the best price.
CAP-Ex is not an expense. It is a savings plan to cover repairs. If you plan for 5% for cap ex, the money is in your account, so it still counts as income. I suggest that people put all of the rental income into a separate account and only spend money from that account on their property expenses. If you have no roof to fix, the money just piles up in the account. It's called savings. Just a suggestion.
@Ryan Short Thanks, Ryan. You hit the nail on the head. I am trying to be conservative and if the deal makes sense after conservatively estimating income and expenses, it help reduces some of the risk of investing.
@James Masotti Appreciate your insight as always, James. You raise great points about the expenses being dependent on the property and the location. While the properties I am targeting are old as well (1920's-1940's), I definitely want to be conservative with repairs and capex, but I also recognize that I will likely be dealing with young professionals and families in my target areas in Camden County. Also, I am looking for deals that need some work, so after rehabbing the property, I think 7-8% each for repairs and capex is more than fair.
@Anthony Dooley Thanks for the extra motivation! I am walking through a property on Wednesday with a contractor and hoping to move forward with it depending on the rehab cost.
Sounds exciting. Looking forward to hear how it pans out. :)
I'm not looking in New Jersey, but i am looking in Massachusetts/New Hampshire. I was trying to crunch numbers to determine my cash flow, but my situation would be owner occupied. Does the expenses/savings plan change when you are also living there or do you just hope the cost of the rent covers half the mortgage and you are able to save some for repairs, cap ex, vacancy, etc..?
@Ian Livaich I had trouble believing that 8 or 10% of my gross rents would be needed to cover such expenses but let me tell you first hand that it is very necessary. I am at 6% right now and I am not covering nearly enough...a simple service call these days can run you $200 per visit and then that can grow higher if the problem is worse than expected and requires additional labor and/or parts.
I would need ~3400 in gross rents to cover this at 6% and that's the bare minimum. If you want a property to work and operate itself then these expenses need to be accounted for. Once I move out of my house hack and increase rents I am aiming at 8-10%.
Best of luck!
I like to play it safe and go with 10%. You never know what could happen and it is always best to cover yourself and protect your investments imo.
Join the Largest Real Estate Investing Community
Basic membership is free, forever.