What's Your True Expense Percentage?

Question

When you're estimating expenses on a rental before purchasing, what percentage do you typically reserve for operating costs?

Do you use a standard percentage?

Or do you calculate each expense individually?

I'd especially like to hear how experienced landlords handle older properties where maintenance can be harder to predict.

Joseph Zimmerman · Answer

I build it line by line on each property, since my custom P&L already runs those lines every month. Taxes and insurance are known a year ahead, so the only part I'm really estimating is repairs. A roof lands once and wrecks a monthly average. Capital items get their own line.

My two handle that differently. The condo sits in an association, so my repairs line there only covers what is inside the unit. On the house I carry the building too. I read twelve months of actuals on that one.

Gregory Acs · Answer

I don't use a fixed percentage by itself. I prefer to estimate taxes, insurance, maintenance, vacancy, capital expenditures, and property management individually, then stress-test the numbers with a little extra cushion for older properties. I'd rather be pleasantly surprised than discover the deal only worked because my expense assumptions were too optimistic.

I also like to look at how those expenses affect financing and cash flow before making an offer. A deal that still performs well with conservative assumptions is usually much easier to own long term. If anyone wants to compare different financing scenarios or pressure-test a deal, I'd be happy to help.

Mike Grudzien · Answer

Good question!