I am curious how (experienced) investors estimate vacancy, repairs, and capex when underwriting deals. I have seen people default to 5% each, regardless of neighborhood class or property age, and I have seen agents send me deals where they default to 3% each, even on 75-100 year old properties where that seems overly optimistic. On top of that, you could have a 2,000 sqf single family home vs. a 2,000 sqf duplex, where replacing the roof would cost less as a percentage of rent for the duplex but replacing something else might cost more - so is the assumption that these average out, or do you use different percentages for single family vs multifamily? Thank you!
I'd stop thinking in percentages for capex and build it from the systems instead: list the roof, HVAC, water heater, windows and so on, note each one's age, and divide its replacement cost by the years it has left. That gives you a monthly number that reflects the actual house, which is why a 90-year-old property can need far more than 5% while a fresh rehab needs less. For repairs, ask the seller for the last couple of years of repair invoices or their Schedule E if they'll share it, since that's real history instead of a guess. For vacancy, look at how long comparable rentals sit on the local listing sites and add the turn cost (cleaning, paint, utilities while it's empty). Then run the deal at a pessimistic case too, and only buy if it still works there.
You are right to question a flat 5% or 3% for every property, because age, condition, and property type change the risk in ways a single percentage cannot capture. I find it clearer to separate the three buckets instead of blending them into one allowance.
Vacancy is about time between tenants and turnover costs, so I look at how long similar homes take to lease and what a turn usually costs. Repairs are the smaller, recurring items that keep a home rentable. Capital expenses are different: they are the big, infrequent items such as a roof, HVAC system, or water heater, and those are better estimated from age and remaining life than from rent alone.
That is why a single-family home and a duplex of the same size can need different reserves. A roof may be one shared cost, while other systems can multiply. For an older home, I would itemize the major systems, test the deal with a higher reserve, and only move forward if it still works. If a deal only works at the most optimistic allowance, I treat that as a warning, not a rounding choice.
Completely disregard anything the list agent sends you for numbers lol. I run through each deal with my clients deal by deal. It won't be a set percent but rather fixed numbers per property type, as the figures will be the same for a $1 million 4-unit or a $500k 4-unit. For example, in my market for a 4 unit in decent shape estimate $500 a month for capex reserves per month. For a 2 unit $300 or so a month, if the building runs on an old boiler heat I would avoid the deal or bump this up higher and also bump up water bill expectations higher. Vacancy depends on area, on the northside of chicago it runs 2 to 3% with close to 0 defaults with proper screening while in some lower income or working class areas of city it runs 8 to 10% and you should expect the occasional default. Find a good local investor realtor and they can help make these figures specific to your area.
I'd stop thinking in percentages for capex and build it from the systems instead: list the roof, HVAC, water heater, windows and so on, note each one's age, and divide its replacement cost by the years it has left. That gives you a monthly number that reflects the actual house, which is why a 90-year-old property can need far more than 5% while a fresh rehab needs less. For repairs, ask the seller for the last couple of years of repair invoices or their Schedule E if they'll share it, since that's real history instead of a guess. For vacancy, look at how long comparable rentals sit on the local listing sites and add the turn cost (cleaning, paint, utilities while it's empty). Then run the deal at a pessimistic case too, and only buy if it still works there.
+1 to building capex from the systems. On vacancy I'd do the math off how often it turns, not just how long it sits. Vacancy % is roughly days empty per turnover divided by how long the average tenant stays.
So if a turn takes 30 days and tenants stay about 2.5 years (~900 days) thats around 3%. Same 30 days with tenants who leave every year is closer to 8%. Single family tends to hold tenants longer than small multifamily in a lot of markets, which is another reason one % doesn't fit both.
For the days empty part, count the clean/paint time before it's even listed plus the days on market. I'd also ask the seller for the current tenants' move-in dates, it tells you a lot about turnover in that building.
I'm a realtor on Staten Island and I run numbers on small multifamily a lot, so here's what I actually use. For a 2 to 4 unit in decent shape I'd put capex around 250 to 500 a month total depending on the age of the roof, boiler and plumbing, instead of a percent of rent. Vacancy I set by area, about 3 to 5% where tenants stay put and 8% or more where turnover is high. Repairs I put at roughly 5 to 8% of rent, and I bump it up if I see old galvanized pipes or knob and tube wiring when I walk it. I'd also stop trusting whatever the listing agent puts on the flyer and rebuild it with your own numbers. If it only works at 3% across the board, it's not really a deal.