Is this a good estimate for expenses or overkill?

Question

I've put together this excel document after reading Brandon Turners "The Book on Rental Property Investing". I'm not sure if I'm budgeting too much for expenses or if that's just how the market is in my area because it is very difficult to find anything that cash flows positive. Here is the excel document:

(this is assuming a SFH 3bd/1ba 1200 sq ft)

Please let me know your thoughts. Thank you.

(this is assuming a SFH 3bd/1ba 1200 sq ft)

Please let me know your thoughts. Thank you.

Alecia Loveless · Answer

@Kevin Sobilo This is how I do it too. I allocate 5% for CapEx, 5% for maintenance and 5% for vacancy. I've had to replace 3 refrigerators in 5 years on 25 units but they were very old. I've not had to do much else.

I wouldn’t worry with a spreadsheet in that much detail because it’s never going to go according to your predictions.

Jaron Walling · Answer

@Austin Bird Good looking spreadsheet. I'm not sure if this is BRRRR deal or flip but the numbers are fairly accurate.

IMO here are some issues;

#1 Do you have experience with foundation repairs? Does the property actually need this repair? $25k for that expense is huge. It's a deal or no deal issue if you ask me and we have REI experience. We cosmic+ remodeled an entire SFH for <$25k. If you decide to buy a property like this you probably need to buy it cheaper, get multiple quotes, and talk to contactors in person. That's when you ask detailed questions. That's how you read body language, negotiate, and get a better price.

#2 $12k for the entire kitchen or just cabinets and countertops? Plumbing, GFCI outlets, tile backsplash, etc.? This is over priced unless you're remodeling a big kitchen, going luxury, or looking to flip.

#3 $2500 for painting (assuming interior) is incredibly low unless you're doing the work yourself. Two coats of paint including ceilings and trim for a 1200 sqft. house in our market is at least $5k including materials. You can probably "find a guy" for cheap but they will spray everything (blow and go) and cut corners. Depends on your expectation for this remodel. Cheaply painted houses drives me nuts. Think about the end buyer or renter.

The negative CF hurts but how much equity is created remodeling this property? What's the ARV? That's where you build real wealth. It's the spread between the purchase, ARV, and future cash-flow (lunch money). Maybe rates dip a little and you rent it for $1400 next year. That could boost cash-flow and make this a fantastic deal.

Cheers man

Kevin Sobilo · Answer

@Austin Bird, here are a few things to consider:

1. This is the big one! Your expected lifespans are nowhere near long enough. For example a roof might have a 25 year shingle but with monitoring and minor repairs can easily last 30-35, maybe even 40 years!

A hot water heater might have a 6 or 12 year warranty, but you can expect it to last double the warranty. So, a 12 year water heater could last 24 years. The one in my own house is 21 years old!

I'm in a heating climate and a gas boiler would be expected to last 30-40 years at least. Maybe as much as 50-60 years if maintained well.

2. Vacancy 8.5% is VERY high. I budget 5% and work to do BETTER than that.

I don't advertise units until they are vacant and 90% prepped. So, a typical turnover takes me 4-6 weeks. If the average tenant stays 2 years that is 5%.

I work to have the average tenant stay LONGER than 2 years. So, my actual vacancy is LESS than 5%. If I chose to try to find tenants before the unit became vacant I could likely cut down on the vacancy time between tenants and further reduce my vacancy to something like 2% but I budget for 5%.

3. Since you cannot predict what things may cost 10 years from now, its not really useful in my opinion to get too detailed trying to analyze the way you have here. You are saving now for an appliance you will buy in 10-20 years when the cost is likely double or triple today's cost.

I simply budget 5% for capital expenses and 5% another 5% for maintenance and work with the money that accumulates in that pot. There are things you can do to save money if you need such as buying used washers and dryers or repairing a roof to delay replacement an extra couple years. The day to day diligence and management makes all the difference and you can adjust those percentages if you need to as well.

4. With regard to finding a cash-flowing property. A deal is what YOU make of it NOT what is advertised to you!

For example, if you find a distressed seller you might be able to take over their loan using a "Subject-To" strategy and inherit a loan at a 3% interest rate! The difference in interest alone versus a loan taken out today might make that property cash-flow.

Another example, perhaps the property has a detached garage that the seller uses as their own instead of the tenant. You could rent that out for additional income.

Another example, negotiation! You aren't buying a home for yourself, so if you cast a broad enough net you can find seller's in difficult situations and negotiate a better deal. I bought a house 2 years ago for over 20% under market price because they had a problematic tenant situation I was willing to take on. They couldn't even show the house because the tenant was denying entry. I had no trouble getting it under control and I got a nice deal in the process.

Austin Bird · Answer

@Jaron Walling Thanks for the reply! This is just a general spreadsheet for calculating capex, regular expenses, vacancy, etc. I just wanted to make sure that 8.5% for vacancy, 7% for repairs, and 11% for prop management is relatively accurate. Also, these aren't problems that need fixed. I was just trying to put together what I should budget for capex. On page 117 of Brandon Turner's "The Book on Rental Property Investing" he has a chart to calculate capex and I did my best to recreate this with more accurate prices (in the book he only budgets $5000 to replace a roof). Here are some answers to your questions:

#1: I do not, I was thinking 25k for a "replacement" might be close, but I have no idea if I'm being honest. What would you budget for this capex?

#2 12K is supposed to be just for the cabinets and countertops (assuming brand new). What would you say is more accurate for a standard size kitchen with labor included in a 800-1200 sq ft home?

#3 Would the 6k with labor and materials be a more accurate estimate?

Is this a good estimate for expenses or overkill?

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