I am in the process of analyzing deals and have been using the four square method as seen in a YouTube video posted by Brandon Turner. My question is, how much should I be putting in for Cap ex, vacancy, and repairs? I have been using 5%. We are looking for our first deal in Olympia/Tacoma area of Washington state. Thanks for any input.
@B Harrison 5% is a good number for vacancy I think given the area it will be less. Maintenance and capex 8% is pretty close depending on age and condition. All the best!
Don't use a %...is misleading. Don't believe me? Take the rent, multiply it by any % you like, and tell me if that % will actually pay for what it's supposed to pay for. If not, how long will you have to take that % out and accumulate it before there's enough to cover what it's supposed to cover? What happens if you have to cover this before there's enough money to cover it?
All taking out a % does, is give you a false security. Go out and get a HELOC on the property...and don't use it for anything but what the %'s are supposed to cover.
Vacancy depends on your sub-market. Check with property managers/brokers/other property owners as to what vacancy rates they actually experience. Then increase that number to at least 10% unless it's above 10%.
CapEx needs to be assessed individually for a given property. If something needs to be replaced/repaired right away, get contractor estimates, add 10% for the unknowns and have that money available upon closing on the property.
For future CapEx, calculate useful life of each major component, get replacement estimate, divide that by the number of years of the useful life and set aside each year. E.g. if a new water heater would cost you $3000 and the existing one has 10 years of useful life, you need to set aside $300/year for that water heater. On large properties the rule of thumb is $250-300/unit/year.
Repairs and maintenance for large properties are usually run around $500/unit/year. That includes make ready as well.
On a small property (SFH), all major repairs should be done upfront and tenant's deposit should be high enough to cover turnover costs.
Great advise. I will be sure to consider my cap ex on an individual basis. I had not thought of a HELOC though. Thank you for the advice.
@B Harrison while a Heloc can be a GREAT idea (seriously!) some banks won’t do it till it’s seasoned for 6 months. So a combo of % of rent till the heloc is closed could be a good mix.