Average percentage used on operating expenses when evaluating

4 Replies

Hello everyone

I would like to get a sense of what percentage (5-10%) you allow for maintenance cost, cap ex & vacancy when analyzing a property I realize it's based on property condition and other factors but let's say for a SFH in updated condition. I was considering vacancy 10%, cap ex 5% and maintenance 5%.

What do you think?

Any advice is welcome

You look at the condition of the home see what it takes to get some picky family.  Most expect a lot. Like newer style kitchen, hardwood flooring, newer SS appliances. Want a gardener etc.

Vacancy depends on how long it will take to get some one staying there 1 mo vacancy is reasonable.

@Denise Sieg 10% vacancy means you will have a turnover every 10 months. As a conservative investor I use 8% or 1 turnover per year. Maintenance is based on how many service calls per year you have plus the cost to rehab the unit on turnover, the larger it is the more it costs you . I average 1 service call per year. Repair a leaky toilet. Burned out oven coil, etc. I use 5% for repairs. Capex can be estimated fairly accurately by using a capex spreadsheet. An example. Floors. Look at the commercial warranty of flooring Almost all is 10 years so that is the lifespan I use. Assume 1000 sf of flooring. My area it is $6 sf to replace. $6000/10 year life span/12 months = $50 per month for 1 item in a capex budget. Still have to budget for roof, hvac, appliances, hot water heater, bathroom and kitchen remodels, etc.

My calculations  show operating expenses are as in the chart below and do not include capital expenses nor the mortgage payments.

The rule-of-thumb is that operating expenses should be less than 40% of the gross income.

I never use a vacancy rate more than 5% since  a high percent of tenats reside in my properties 5 to 10 years and almost every tenants stays no less that 3 years. If the average tenant stays 3 years then you have to calculate the number of months the tenant stays. So, if a tenant moves out on the 36h month then divide 36 b 100 and get a vacancy rate of .036 rounded off is .04% and NOT 4% and the next most critical factor is to consider the time to get a new tenant in the unit. If you are on top of your game you can often (not always) get a tenant in within a few days. So, now you have almost a zero vacancy rate.

Maintenance is included in the annual expense chart. Some landlords put 5% to 8% of the rents aside for maintenance. The condition of the property makes a huge difference. If the property is in a fairly new condition there may be very little maintenance.

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