Rental Portfolio Purchase / Should Expenses Be Equal Across All?

[Michael Hopkins]

I'm looking to acquire 10+ SFR rentals. Let's assume I've accounted for all the following expenses before profit:

Mortgage

Insurance

Vacancy (5%)

Repairs (5%)

CapEx (10%)

City Services (utilities, etc.)

Let's assume the condition of each SFR rental is in fair shape. No immediate repairs required. And the demand for student rentals (these are in a university town) is strong to the point that there's typically a waiting list to rent any of the houses within the portfolio.

The question then, is should each property equally have the same amount of expenses set aside for expenses each month?

Knowing that not all properties would require repairs/capex at once, and that not all properties would experience vacancies, is it necessary for ALL properties to have 10% set aside each month for CapEx, 5% for repairs, etc?

If not, this improves the cash flow and helps me better underwrite and reconcile a Seller price point that seems a little higher than Fair Market Value. 

Any insights appreciated, particularly from you larger rental portfolio owners! Cheers. 

[Michael Peters]

The 5% on repairs and cap ex is just a rule of thumb, but on a larger acquisition your discussing it should most likely be close to accurate if you average all the properties expenses.  I would make sure to run your numbers on each property so you aren't burned after the purchase.  For example a 100+ year old property might require 10% cap ex while one that was built post 2000 might only need 3%.  I'd recommend running the numbers on each individual unit.

I would also make sure to confirm if the owner has pictures, condition catalogs, and deposits prior to close.  If they don't I would make sure to account for larger turn over costs when the current tenants move out since there will be very little you can withhold.