Buy and Hold Property Evaluation

27 Replies

For all of the successful Buy and Hold investors:

What percentages do you use for the following when evaluating a potential buy and hold income property:

1) Cap Ex

2) Management

3) Vacancy

4) Repairs

Thanks in advance!

1) Cap Ex - $150/month/roof minimum

2) Management - 10%

3) Vacancy 8.1% 1 vacancy/apartment/year

4) Repairs - $25/month

Assume small residential buildings.  This is solely for pricing purposes. (While reality seems somewhat in line.)

Represented as percentage of gross rent.

1) Lumped with number 4. Around 10% in total.

2) Actual - for me, it is 7%, but others may vary.

3) 8%.

4) see item 1.

A word of caution - don't treat these numbers as your bible.  Have some flexibility to it.  Do not price too "tight". For example, if you think you would have made money if a parameter is 7% but would have lost money if it is 7.5%, chances are the deal is not good enough to begin with!

All those numbers are great to look at. But I think more importantly you should look at what's going on in the area. When you buy and hold, you need to look at other factors as well. What's the rental market doing? What's the job market doing? Is the vacancy rate low or high for the area? Are you in an area with more renters than owners? These are just some of the things you should keep in mind.

@Che Chiu Wong

@Aristotle Kumpis

Thank you both for the caution. I am just trying to get a general idea of what successful investors use for the fields mentioned above to plug in to the Bigger Pockets Calculator to evaluate Investment Properties.

1) Cap Ex. 100/mo

2) Management. 0 - I self manage.

3) Vacancy. 5%.   I've been running at 2% to 3% over the last few years. But I know that won't last forever. 

4) Repairs. 50 to 75/mo depending on the property.

I think it also depends on how many properties you have and what those numbers look like. At some point, you'll just go with your own historical numbers.

I've never been one to believe in percentages though. A roof is a roof is a roof. If you're in a low price point for your homes and you're buying 50k houses that are renting for 700/mo, you either have to have a much higher percentage for capex and repairs or else you're not going to be able to replace your roof. :-)

Thats why I think the dollar amount set aside for items makes more sense. Age of the home and size still makes a big difference and is probably what you should use to get even more accurate.  But at some point, once you build up enough of a portfolio, its just easier to average things out.

If you only want to buy a handful though, it might make some sense:

i.e. 1,000 to 1,500 sq ft home - Capex is 80/mo and repairs 50/mo
1,500 to 2,000 sq ft home - Capex is 90/mo and repairs 60/mo.
2,000+  Capex is 100/mo and repairs 70/mo

And then you'd have some sort of multiplier for age. i.e
1900 to 1950 - Add 20% to those numbers (capex 95/mo, repairs 60/mo for 1000 to 1,500)

1951 to 1980 - Add 10%
1981 to 2000 - No multiplier
2000+ Subtract 10%

Again, you'd really have to want to get into some analytics. But if you really wanted to come up with a more granular way of estimating that stuff, that would be the formula I'd look to put together.

However, as I said, I'm too lazy for that to be honest. Its 100 and 70 and call it a day. Age, Size, etc, don't matter to me as much.

And to be honest, I really don't care about those numbers as much as I do my gross profit numbers on the house.
RENT minus PITI = Gross monthly profit.

As long as I'm hitting 350 to 400/mo or more on the gross monthly profit, I'm willing to take it down.  Anything lower than that and I really have to have a compelling reason to grab it. Maybe its near new construction? Or maybe there is a ton of equity capture? etc.

I'm averaging about $435/mo in gross profit. And that average has come up over the last two years of deals.   And I know I make money at 350/mo so I'm happy. :-)

@Mike H. - Thank you for the wealth of knowledge you just shared! So many additions to my evaluation toolbox. Love this...

RENT minus PITI = Gross monthly profit

It just keeps thing simple. However, as this will be my first investment, I'm trying to develop a good business plan that looks at every property through the same lens, covering the multitude of expenses other investors have encountered so there are minimal surprises and sufficient funds to cover them. I can tell by the feedback I've gotten so far, that many investors dislike the percentage approach because of real-life experiences where a blanket percentage might have led them astray.

That's my main reason for this post...want to observe what more experienced investors do when evaluating the property, so I can develop a method that has worked for the masses (if such a method exists), and not repeat mistakes already made by those who have already made them.

Originally posted by @Keith John :

For all of the successful Buy and Hold investors:

What percentages do you use for the following when evaluating a potential buy and hold income property:

1) Cap Ex

2) Management

3) Vacancy

4) Repairs

Thanks in advance!

Out of all of those items, really vacancy and management are the only ones related to rent.

This is especially true of CAPEX -- trying to calculated as a % of rent can yield some wacky results.

Calculate CAPEX based on size of house, roof type and area, size of condenser, flooring, amount of wood/siding, etc.

Here are my preferred #s if I can find something that meets these despite such high expenses #2-4.  I like to estimate 10% to prepare for large expenses long-term (never know when they will hit).

1) Cap Ex - $100/door per month

2) Management - 10%

3) Vacancy - 10%

4) Repairs - 10%

Originally posted by @Frank B. :
Originally posted by @Keith John:

For all of the successful Buy and Hold investors:

What percentages do you use for the following when evaluating a potential buy and hold income property:

1) Cap Ex

2) Management

3) Vacancy

4) Repairs

Thanks in advance!

Out of all of those items, really vacancy and management are the only ones related to rent.

This is especially true of CAPEX -- trying to calculated as a % of rent can yield some wacky results.

Calculate CAPEX based on size of house, roof type and area, size of condenser, flooring, amount of wood/siding, etc.

Thanks for the insight Frank B! Curious why you wouldn't consider repairs into that figure for rent?

Originally posted by @Bryan C. :

Here are my preferred #s if I can find something that meets these despite such high expenses #2-4.  I like to estimate 10% to prepare for large expenses long-term (never know when they will hit).

1) Cap Ex - $100/door per month

2) Management - 10%

3) Vacancy - 10%

4) Repairs - 10%

Bryan, thank you for the response! How active are you in your properties? Do you hire out repairs and management?

I have to hire out repairs & management which is why i go with 10%....I do stay actively engaged on the condition and decisions

Originally posted by @Keith John :
Originally posted by @Frank B.:
Originally posted by @Keith John:

For all of the successful Buy and Hold investors:

What percentages do you use for the following when evaluating a potential buy and hold income property:

1) Cap Ex

2) Management

3) Vacancy

4) Repairs

Thanks in advance!

Out of all of those items, really vacancy and management are the only ones related to rent.

This is especially true of CAPEX -- trying to calculated as a % of rent can yield some wacky results.

Calculate CAPEX based on size of house, roof type and area, size of condenser, flooring, amount of wood/siding, etc.

Thanks for the insight Frank B! Curious why you wouldn't consider repairs into that figure for rent?

Same reason as for the CAPEX--repairs are based on the property, not the rent.

Say you have a 500 square foot house in city X that rents for $1,000/mo, and you also have a 30,000 square foot mansion in Detroit that also rents for $1,000/mo (sorry Detroit).

Which property do you think will have a higher expense for repairs? With an extreme example like this you can easily see that it really doesn't make sense to estimate some of these costs based on a percentage of monthly rent. They should be based on the characteristics of the property.

Originally posted by @Bryan C. :

I have to hire out repairs & management which is why i go with 10%....I do stay actively engaged on the condition and decisions

 Good to know. Thank you Bryan!

Originally posted by @Frank B. :
Originally posted by @Keith John:
Originally posted by @Frank B.:
Originally posted by @Keith John:

For all of the successful Buy and Hold investors:

What percentages do you use for the following when evaluating a potential buy and hold income property:

1) Cap Ex

2) Management

3) Vacancy

4) Repairs

Thanks in advance!

Out of all of those items, really vacancy and management are the only ones related to rent.

This is especially true of CAPEX -- trying to calculated as a % of rent can yield some wacky results.

Calculate CAPEX based on size of house, roof type and area, size of condenser, flooring, amount of wood/siding, etc.

Thanks for the insight Frank B! Curious why you wouldn't consider repairs into that figure for rent?

Same reason as for the CAPEX--repairs are based on the property, not the rent.

Say you have a 500 square foot house in city X that rents for $1,000/mo, and you also have a 30,000 square foot mansion in Detroit that also rents for $1,000/mo (sorry Detroit).

Which property do you think will have a higher expense for repairs? With an extreme example like this you can easily see that it really doesn't make sense to estimate some of these costs based on a percentage of monthly rent. They should be based on the characteristics of the property.

 Well, that makes a great deal of sense. I hadn't considered that approach. So do you always use square footage/quality when doing your evaluation for repairs? Lol on Detroit comment! You and @Josh Dorkin must be talking!

The other part of the equation that no one has mentioned is depreciation.  It is going to make the difference in weather you pay taxes on the income or not.

Depending on your income level and other passive/active income sources, it could be the most profitable part of the property.  i.e. breaking out the property in to its individual core components for depreciation, which allows shorter schedules than the standard 27.5 years.

Originally posted by @Lesley Resnick :

The other part of the equation that no one has mentioned is depreciation.  It is going to make the difference in weather you pay taxes on the income or not.

Depending on your income level and other passive/active income sources, it could be the most profitable part of the property.  i.e. breaking out the property in to its individual core components for depreciation, which allows shorter schedules than the standard 27.5 years.

Hi Lesley! So, do you use depreciation in your evaluation of potential properties before purchase? 

Yes, especially if i am going to be doing any reno work.  I want to limit my tax liability as much as possible.  There is a difference between repair and improvement.  Repair can be taken in the year of acquisition and everything else must be depreciated on the correct schedule.  

Since my day job is real estate I can take depreciation against any of my income.  If you are not an IRS termed "real estate professional", there are limitations to passive income topping out at $25k.  I am not an accountant but, have learned a little along the way.   

Originally posted by @Lesley Resnick :

Yes, especially if i am going to be doing any reno work.  I want to limit my tax liability as much as possible.  There is a difference between repair and improvement.  Repair can be taken in the year of acquisition and everything else must be depreciated on the correct schedule.  

Since my day job is real estate I can take depreciation against any of my income.  If you are not an IRS termed "real estate professional", there are limitations to passive income topping out at $25k.  I am not an accountant but, have learned a little along the way.   

Wow! There is yet another benefit of becoming a real estate agent! @Brandon Turner ... It leads to more questions Lesley...what income do you file as passive? Is it rental income or flip profit? Just to clarify; are you depreciating both the property and any renovations after the initial repairs are claimed in the first year, or just the property? Thanks!

Passive vs active income is not so much about being a real estate agent, it is meeting the IRS designated real estate professional criteria.  There are a number of criteria, mostly around where your income comes from.  Is your income  w2 from an company or is related to real estate.  If you have a day job that pays the bills, it is unlikely you are an irs designated real estate professional.  You can still take 25k if you actively manage your real estate.

I look at this way, my day job is a real estate broker/agent for other investors and my second job/investment is my portfolio as a buy and hold investor.  

Depreciation on flips is different than on buy and hold.  If you flip, there is no time element in owing it.  Ideally out in 90 days.  However, everything you do is basis and can be subtracted from the profit.    

Buy and hold does have the time element and should be considered carefully.  Its like getting a raise for no more work.  Depreciation is the accounting idea that something is worth less in the future.  Real estate, in realty, does not  follow that concept.  A car is a better example, because it wears out as you drive it.

Within a piece of real estate there are a number of components, appliances, cabinets, landscaping, etc.  They can depreciated on different schedules, the shorter the better.  Doing this adds complexity and can cost you money to set it up.  It can also save you a ton of money.  Here is the rub, if you bought a stable in good condition property how much are the kitchen cabinets worth?  Hard to tell, there are services that will come in and do an assessment.

However, if the kitchen was destroyed in a fire and you replaced it you can take it off your taxes as a cost in the year you did the work.  If you bought a house with a 70's orange kitchen and upgraded it, then you would have to depreciate it.  You could use the standard and do it as part of the house on 27.5 years or on a shorter schedule that is 5 years.  Since you just did the kitchen reno you know the basis as opposed to having a study done to estimate the value of the old kitchen.

Thank you for taking the time to explain the difference @Lesley Resnick! Very helpful and something my wife and I have been pondering. 

I think the other thing to mention is that after you put in your percentages of 10% for management, $100 for Cap Ex, etc., you should look at how all these numbers interact together on your rental income statement so you can get a final annual estimate of your CFBT cash flow before tax.  Then you will know your cash on cash return to buy your rental and determine if this meets your desired goal.  Whether it is 5 or 10 or whatever percent, no right answer here other than are you happy with the result compared to your goal for the house and factoring risk and your time to manage the property.

Thank you @Ken Martinez! I really love the calculators Bigger Pockets has put together because it calculates your cash on cash after you plug in all of the variables. It really opened my eyes being a newb and seeing just how poorly some of the properties I thought were great deals had poor cashflow.

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