% for Vacancy, Repairs & Maint, Cap Ex, & Future Assumptions?

Question

I've  been analyzing several deals, but I keep getting stuck in what percentages to  put for the Vacancy, Repairs & Maintenance, Cap Exp., and Future  Assumptions. I've seen several webinars, and the Hosts always uses  different percentages. Since I am just second guessing the percentages, I am not  analyzing it correctly.

Is there a rule of thumb for these expenses or how do you determine what percentages to put  for the Vacancy, Repairs & Maintenance, Cap Exp., and Future Assumptions?

I appreciate the feedback!! Thank you.

Anthony Wick · Answer

@Dolly La Salle  As an example...I bought a duplex this year that is a 0.95% rents to purchase price. It seems low, but it was fixed up within 4 years, had a 4 year old roof, and I negotiated new HVAC throughout both sides. I also looked at a 4 plex in Des Moines. Was about a 2.5% cash flow rents to purchase. 2 units were empty, 1 unit was being evicted, 1 unit was paying rent. And, the house next door was boarded up but was also a squatter house with the front door wide open. I don't have the time or energy to knock on doors every month to attempt to collect rent, or worry about crime. In essence, I'm choosing lower cash flow, with less headaches. I know many thrive in Class C or D. I am not one of them.

Now, my approach for reserves for capex, vacancy, and maintenance also goes along with the neighborhood, and the actually property. Do I need 10% capex & maintenance reserve when I have brand new furnaces, AC units, roof, hot water heaters? Probably not. I use 3% vacancy, 5% capex, 5% maintenance for this particular property (*Full Disclosure: my day job pays my bills, so in reality I'm setting aside 100% of cash flow, but some of that money will also go towards more purchases). And, while I do self manage, I figure in 7-10% Property Management fees when I evaluate purchases.

Rivy S. · Answer

@Dolly La Salle  it's actually usually the opposite-- class C you can sometimes get 2%, but will probably have headaches with the tenant.  For class A, you'll be lucky to get 1%, but you can likely find a higher quality tenant.

(For example, in my area, a class A house will probably cost 250-300k, but will only rent for 2500.  But if I got to class C neighborhoods, I can probably find a house for 90k, that will rent for 1500, but...)

Dolly La Salle · Answer

@Rivy S. but....there's always a but, right? Something's gotta give. I guess in Class C neighborhoods, you can cash flow a bit more, but it all depends on the crime rate of that neighborhood, at least for me. Thank you for the clarification. I understand it a bit better now. I'm also have a conservative mentality. I prefer ready for the worst, but hoping for the best.

Rivy S. · Answer

And btw, I guess I'm super conservative, and also still a newbie, but I do 8% for vacancy and 10% each for capex and maintenance, because I'm assuming a long term hold, and that eventually *everything* will need to be replaced.

Dolly La Salle · Answer

@Anthony Wick I see. So, it depends on the town then. I've been using 2% this whole time because that's what I saw in a Webinar. That explains why my analysis never came out w/ good cash flow. The rent was too high w/ 2%. So, perhaps a Class B or C could use the 1% and Class A could use the 2%?

Anthony Wick · Answer

@Dolly La Salle  Around here, if it's a 2% rule then it's in a part of town you're probably not going to be collecting rents every month anyway. That's just what I've seen. In my town, 1% is a decent rate to get right now.

Dolly La Salle · Answer

@Dennis Burian Thank you for your input. I appreciate it.

Dolly La Salle · Answer

@Anthony Wick That makes sense. Thank you for the numbers/explanation. I thought it was a 2% Rule for the monthly rent of the purchase price?

Dennis Burian · Answer

@Dolly La Salle Those numbers will vary by the type of property you’re looking at.

Our portfolio is 50 to 80 years old and we expect about 10% of gross rents in maintenance. 5% is a good vacancy rate. I use a fixed price for capex because the cost for items that will be considered a capital expense doesn’t depend on the size of the house like maintenance does, e.g., a water heater costs the same for a garage apartment as for a 1300 sf house.

If you’re looking at a multi, factor in the increased expenses like lawn care and capex gets more complex because some capex items are one per unit and some are for the whole building. But you’ll work through it.

As for Future Assumptions, you’ll have to arrive at those numbers by looking at historical data for your local market and look at where your city’s economy is going.

Anthony Wick · Answer

My assumptions are all over the place, depending on the actual property. For example, I bought a duplex this year that had brand new furnaces, hot water heaters, and AC units, and a roof that is 4 years old. Capex should be quite a bit lower over the next 5-10 years than a house with 12 year old HVAC and 20 year old roof. Until I view the property, I've been assuming 3% vacancy, 5% maintenance, 5% capex, 7-10% property management. It's kind of like a 1% rents to purchase price assumption. A nice starting point until I can view the property and refine my numbers. Of course, my actual bid on the property could vary widely once I see the property as well.

% for Vacancy, Repairs & Maint, Cap Ex, & Future Assumptions?

Most Popular Reply