How do I calculate capex/vacancy on a turnkey on a 2 year lease

Question

Account Closed · Answer

@Amir Navabpour Just to clarify, when you say "addresses all major capex issues", does that mean that they did all of that before they sold it to you or that they will do it in the future as well?

Either way, I would still factor in CapEx and Vacancy except maybe figure 7% for CapEx and 8% for Vacancy.  It can never hurt to be sure you're setting aside enough for future events (especially if this is a SFH) and one month of vacancy could eat up several months of your cash flow.  This way, you'll also be able to see if your positive margin on estimated cash flow is enough or if you'll have to think of creative ways to squeeze out more $$.

Mikhailangelo L. · Answer

@Amir Navabpour I am close signing a contract on a TK in Ohio. How has your property performed over the past 3 years? Would you do it again?

Sean Tarpenning · Answer

I don't suggest buying out of state and attempting to rehab yourself.  That's what a turnkey operation is for, buying out of state with peace of mind.  I recommend talking with others who have bought from reputable companies in the market you are looking in. @Amir Navabpour

Larry Fried · Answer

@Amir Navabpour It should be calculated for the particular property, so you can project based on realistic expectations but how conservative those estimates are depends on your particular comfort level.

Yuri Weinbaum · Answer

Hi Amir

Can you share more details on your turn key property ?where did you find it and which state ? I am also considering buying one but still unsure where

Ali Boone · Answer

It depends on what you are using the calculations for. You will still have vacancy later down the road, so it's good to assume it will happen eventually. For turnkeys I usually use 5% for repairs (not CapEx) and 7% for vacancy but that one depends on the area and what the vacancy rates are there.

But if you already own the property, what do you need the numbers for?

Anton Ivanov · Answer

@Amir Navabpour

There is "pro-forma", meaning hypothetical, projected numbers, and there there are the real cash flow and returns you get from a property. Turnkey or not, 2 year lease or not leased, etc. I personally always account for all expenditures, including vacancy when calculating pro-forma numbers. They just give you an average expected cash flow and return. They are useful for comparing properties and judging their expected performance.

So to answer you question, I would leave vacancy and cap ex in your projected calculations. On the other hand, you should record your actual performance and then in 5-10 years you can look at your portfolio and actually see how your properties are doing and wether the actual numbers match your projections. Then you can either start adjusting how you calculate your projections (if they are repeatedly off), or sell underperforming properties (sometimes no matter how good your projections are, the property will just perform worse and there is little reason to keep it long term).

As far as calculating projected vacancy and cap ex. For vacancy, it depends on the city (if there is strong rental demand or not), neighborhood (usually faster to rent in desirable, higher end areas) and the house type (multi vs single). Cap ex can be estimated as a percentage of gross rent (like you're doing and what I do), a set dollar estimate, or if you really want to get detailed - an actual dollar value derived based on actual projected expenses, their cost and their useful lifespan.

Hope this helps!

James Wise · Answer

@Amir Navabpour you should make your vacancy assumptions based upon the assett you purchased.

For instance in the Cleveland area my company sells single units and multi family units in Cleveland proper as well as the suburbs. We expect a higher vacancy for properties in the city of Cleveland itself then we do for the suburbs. Furthermore we expect a higher vacancy for multi family units then we do fo single family units.

Other factors to consider when determining vacancy. How nice and or updated is the home?

How much is the rent? At market? Just below market? Just above market?