Factoring Vacancy and Future Repairs

4 Replies

I am trying to acquire my first rental property this year and I was hoping someone can help me out when it comes to expenses that I have to factor in with a rental property. After reading the boards and a couple books I am still kinda confused. So far this is a list of expenses I know that should be accounted for 

-Property Tax

-Vacancy 

-Insurance 

-Repair 

-Advertisement

Is that all that is needed? also what is a good percentage to set aside for vacancy and repair reserves? Thank you anyone ahead of time for some answers.  

You might want to also factor in a Property Manager if at some point you don't want to manage it yourself and/or if you use an agent to place a tenant if managing yourself. Depending on where you live the agents charge around 1 month rent to place a tenant. In NYC the tenant pays this fee cause it's a strong rental market here but I have found much better quality tenants coming from a broker than finding on my own. Also depending on the neighborhood you invest in you could have a HOA fee. And you might consider setting some money aside for capital expenses in the future ..roof...water heater...HVAC etc.

forgot to add ...my investor friends tell me 10% to set aside for maintenance and vacancy for a newer property or one that is newly rehabbed or 15% for an older property on a SFH. Assuming these numbers would be higher for a place in a bad area. I have found for an apartment/condo in a market like New York City to be much lower than that cause super strong demand and nothing to take care of on the outside. So it needs to be adjusted to your situation and area you're buying.

I start out by estimating $1,000 per year for repairs and $1,000 for capital reserves for a 1,500 foot house.  I use a 5% vacancy factor unless I have some historic data that is different.  I budget 10% plus one months rent to fill a vacancy.

Good Luck.

Bill

Vacancy - 5% of the rent in most markets is a pretty safe number. 
It also depends on how many houses you have. When you have 2 or 3, that number may end up being more for a year (10%) but at the end of the day, thats pretty much where it nets out over a long enough period of time and/or several houses.

Repairs - $75/month per house including make ready costs. 

Capital - Depends on age of your homes, size of your homes, and how much of a rehab you did. I'm in year 7 or 8 of my investing and I have not seen many capital expenditures like some of the people here are suggesting.  But I almost always replace the water heater and the hvac's are either new or near new as well. And all the appliances are new as well. So that limits my capital stuff to roofs? Windows? Flooring? 

I actually think you need another factor in there that covers your rehab quality and how far along you are into your rehab. So your first 5 years, if your rehab is decent, your repairs may only be $50/month including make ready.  Next 5, $75, then $100 and so on.

re: advertisement.

Not sure what area you're in but your advertisement expense won't be much if anything. craigslist and postlets should give you plenty of traffic for most areas. Only the smaller areas (of which I have a few houses in myself) might need the newspaper. But the paper costs are lower too ($40 for 4 weeks?).

I'd almost roll that into nothing.

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