What percentage of rent are you using for reserves?

Question

When I first started looking into real estate investing a few years ago, I read multiple sources that said a conservative number for repairs, cap ex, vacancy are each 10% of rent. I've been seeing some people using numbers way lower than this (5% and even lower than that sometimes). What percentages are you comfortable with from a conservative position? I know these numbers greatly depend on the age and condition of the property.

Jaysen Medhurst · Answer

@Trevor Cox,

• I use 15% combined for repairs and CapEx (bump up for less expensive properties, may be able to lower for more expensive).
• 8% for vacancy. This is very localized and you need to know your market.

Trevor Cox · Answer

@Jaysen Medhurst That's good reasoning for the 8%. I like it. Thanks again!

Jaysen Medhurst · Answer

@Trevor Cox, I keep my underwriting pretty conservative for the same reason.

8% vacancy is 1 month/year. So, if a tenant stays 2 years you lose 2 months rent--1 empty for turnover, 1 as a standard lease-up fee. That's how I think about it.

Trevor Cox · Answer

Thanks for the response Jaysen. Your numbers seem to be closer to what I have seen. I was just surprised to see how many people are using 5% or lower. Briefly doing some research of the vacancy rates over the years I was thinking 10% was a good number if I wanted to stay conservative. I figured if I can make a deal work at those numbers, then it would only get better with the lower percentages. Thanks!