Investor · Cincinnati, OH · Member since 2015 · 229 posts · 50 votes
Not sure if you guys listened in on Ben Leybovich's webinar last night, but I have to say I agree with him.
He showed how you can drastically come up with a different valuation of a property ALL based on your assumptions. The expense assumptions are more than just simple percentage, it begins with the story of the property, as Ben put it.
What do you typically use for your expense assumptions and why do you use them?
I think it depends on the market as well as the asset type. I own C properties in Knoxville, TN. When I refinanced the property, the bank assumed a 3,600 per unit expense figure for 136 units. They were pretty close. We try to run between 3200-3800 per unit. We just purchased a B in the same market and the expenses may run a bit higher because of the amenities, higher taxes.
I use a 50% rule of thumb for expenses as a percentage of total income. If you see a property running above 60%, then you may have an expense play. Anything below 40%, then you are looking at self storage or a dishonest or disillusioned seller.
@Jason Slater, I'm not sure that it matters what environment we are in when it comes to finding opportunities. You may have to wait it out as a bad deal is worse than no deal. If you don't properly plan for these expenses, you'll be in trouble.
And it's like death by a thousand cuts.
Example - I just had a unit come available. The water heater is still functioning. But it was installed in 2003 (by the previous owner). There is no way I'm not changing that thing out during this turnover.
But I planned for it. Every month, I set aside money for these types of expenditures, and it doesn't matter if the unit rents for $1000/mo or $400/mo. In six years, I better have the $800 it's going to cost. I already know the roof needs to be replaced in the next five years. I've estimated what that's going to cost and am putting the money aside right now for that expense.
The "rules" of 10% for maintenance and 5-10% for CapEX are back-of-the-napkin stuff. Used to help quickly analyze an opportunity to see if you want to explore further. During the due diligence period is where it needs to get real and you are writing down exactly what your expenses will be using hard numbers (as only you can best estimate based on your area).
Ron, thanks for the input, what assumptions do you use for your small multi family buildings in regards to maintenance/repairs, vacancy and CapEx?
Each and every one is different and is based on the current condition and characteristics of the property itself. Think of it like this... a buy-rehab-flip guy/gal will get a listing of everything that needs to be done to put the property into retail condition. That is a massive list that will have replace items, repair items, and leave alone items on it.
If you are buying an investment for the long-term, you need to take that list and do the same thing. Only the "leave alone" items are not a $0 cost item.
Instead, each "leave alone" item should be given a likely life-span remaining and an expected cost to replace. You need to do the same with the "replace" and "repair" columns as well.
Do the math and you'll know how much to put aside each month for you CapEX.
The more "replace" and "repair" you do up front, the less your maintenance costs will be. But you still have to replace eventually.
The biggest mistake I think "hobby" investors make is to never plan for the repairs and maintenance. I'll go to an existing, solid resident and offer to paint (an acceptable color) a room for them well in advance of their renewal. Less expensive than a turn-over.
When first presented with an opportunity, I'll use the rules-of-thumb to see if I should even spend time running more detailed numbers. My expenses are usually 45-55% depending on the community - licensing, water/sewer included, etc. can make a big difference in the expense category.
But once it's time for due diligence, I'm writing down everything I can think of.
I think it depends on the market as well as the asset type. I own C properties in Knoxville, TN. When I refinanced the property, the bank assumed a 3,600 per unit expense figure for 136 units. They were pretty close. We try to run between 3200-3800 per unit. We just purchased a B in the same market and the expenses may run a bit higher because of the amenities, higher taxes.
I use a 50% rule of thumb for expenses as a percentage of total income. If you see a property running above 60%, then you may have an expense play. Anything below 40%, then you are looking at self storage or a dishonest or disillusioned seller.
South Bend, IN · Member since 2015 · 180 posts · 93 votes
10y
Logan Hassinger How did you determine $6k in reserves was appropriate for you on that property? Was it as simple as determining your CapEx projected "Cashflow" and observing that at no point would you need more than $6k in the bank to cover it?
The 6k was determined by a number of factors including average cost of item to replace, the life expectancy, and estimated timing of replacement based on current condition of each unit.