How much % of rent goes towards expenses?

14 Replies

Hello everyone,

I feel like I should've been able to find the answer to this question by looking through the forums but for some reason I cannot find it.  So forgive me if it was right under my nose.

So, when calculating expenses is there a guideline that you all usually go by when it comes to the % of rent that is being used for certain expenses?  For Example:

Expenses

Property Management %?

CapEx %?

Vacancy %?

Maintenance %?

Ect...

Thank you all and Happy Labor Day!!!

These numbers are a city by city case by case basis.. I also like to round up with the numbers...

Property management 9%

Cap ex3%

Vacancy 3%

Maintence 2%

Those are my averages I use but it's a per property number.

Although it is probably on the high side, when banks analyze your rental properties to calculate your net income on a property, they calculate your overhead expenses to be 25% for things such as property maintenance, vacancy, etc.. Such probably is an extreme amount for some folks, but it's probably not a bad rule of thumb to consider.

Over the long term, the consensus for all Op expenses here on BP seems to be close to 50%, not including debt. A lot depends on the age and condition of your building. Mine are closer to 32%, but I do 95% of everything myself.

 I like @Nick Britton estimates, but I tend to guess higher on maintenance, towards 5%.

Collection loss is an additional 2-3% I always subtract out to get effective gross.  Some just aren't going to pay.  Interesting discussion @Benjamin Blackburn!

Thank you @Nick Britton those ... I figured it would be case by case.  Thanks for the averages though.  I have something to build off of now. 

@Jimmy Humphrey Definitely on the high side but something to think about for sure.  Thanks for your response.

@Steve Vaughan thank you for your response.  I didn't think about collection loss. 

I have newer higher end home that I self manage and my tenants pay all utility cost. Therefore my maintenance costs are 5-10% (usually much less) with no there costs.

From my research and readings it seems that 7-10% is the standard for Prop. Management, vacancy, maintenance and repairs.  I adjust cap expense depending on the properties age, sq feet, when it was done last etc.  Example, I don't need to put as much back for a roof if a new one was just put on 3 years ago, compared to one that needs one in a year or two. 

I calculate these expenses very conservatively, but I will share my ideas to add to the pool.

Property Management 10%

-industry standard seems to range 2+/-% around 10%.  To be sure, just find out what the rates are for well-reputable companies in your area.

CapEx 1-10%?

This is going to vary widely depending on age and condition of asset, as well as for how long you'll hold it.  You'd better do an assessment of the condition of and when you are likely to replace and for what price the following capital goods: roof, drive, furnace, a/c, water heater, stoves and other major appliances, etc.

Vacancy ~8.3%?

This will vary depending on local rates.  Sometimes this information can be found online (e.g. http://www.city-data.com/housingDir2.html), but this data is difficult to trust.  This is the type of circumstance under which thorough knowledge of your investment's locality is necessary.  This is especially true in cities where there is demographic segregation by income, race, or occupation.  For example, in a university town in which the student body is rising in population (these figures are very easy to find, my hometown for example: http://ro.umich.edu/enrollment/enrollment.php), you may lower your vacancy rate.  If you are buying in a location where you already have assets, I'd suggest just gleaning a percentage from the average of your assets and applying that to your new asset if it is of a similar type.  Me, personally, I calculate one month per year, which is 8.3%.  I do this because sometimes turning the apartment takes time, sometimes finding a tenant seems easy, but then the tenant backs out, etc.

Maintenance 5-10%?

Again, this will depend on the age and condition of your asset.  Also, another key factor is your access to a handyman and/or trusted contractor.  Without these, you may want to estimate a high maintenance cost of about 10% as hiring 'experts' a la carte will likely be less cost efficient.

I use 5% vacancy , 5-8% maintenance  (lawn care is seperate and number depends on condition), 5% capx ( 8% if roof is older). I self manage and by the time i give it to a PM i will have more cash flow so budgeting is no issue.

Thank you all for your insightful responses.  It really allows me to get a good feel of everything.  So, I have one more question and it might be kind of weird but here goes...

When it comes to the expenses that aren't getting paid monthly, where do those funds go?Are they just being stored in one seperate bank account?

Originally posted by @Benjamin Blackburn:

Thank you all for your insightful responses.  It really allows me to get a good feel of everything.  So, I have one more question and it might be kind of weird but here goes...

When it comes to the expenses that aren't getting paid monthly, where do those funds go?Are they just being stored in one seperate bank account?

 That really depends on how you'd like to do it.  If you need to keep the funds separate in another bank account, there's no issue doing it that way.  For landlords who have multiple units, they will typically keep a separate account with reserves to cover all of their properties.  Keep in mind that if you own 10 properties, you don't necessarily need to keep 10x as much in reserves.  It's unlikely all the roofs will need to be replaced at the same time, for example.  Though you will have things like property tax bills that come due at the same time.

Originally posted by @J Scott:
Originally posted by @Benjamin Blackburn:

Thank you all for your insightful responses.  It really allows me to get a good feel of everything.  So, I have one more question and it might be kind of weird but here goes...

When it comes to the expenses that aren't getting paid monthly, where do those funds go?Are they just being stored in one seperate bank account?

 That really depends on how you'd like to do it.  If you need to keep the funds separate in another bank account, there's no issue doing it that way.  For landlords who have multiple units, they will typically keep a separate account with reserves to cover all of their properties.  Keep in mind that if you own 10 properties, you don't necessarily need to keep 10x as much in reserves.  It's unlikely all the roofs will need to be replaced at the same time, for example.  Though you will have things like property tax bills that come due at the same time.

Ok makes complete sense.  Thank you very much! 

Generally 50% of the rent goes to expenses (not including debt service, the mortgage payment)

Property Management 10%

CapEx 1% of the property value every year (about 10% per month)

Vacancy 8%

Maintenance 10% monthly

Insightful post thanks! Good Luck

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