Quote from @Dan H.:
Quote from @Mike Day:
@Dan H. @Travis Biziorek
Dan and Travis, I'd love to hear you guys hash out appropriate vacancy and maintenance numbers on low-cost rentals in the Midwest.
Travis owns rentals in the Midwest and uses 15%, Dan thinks it should be 45%+.
I do not know how to say this clearer: maintenance/cap ex should not be based on a percentage of rent. I showed examples of why this is bad even if many rental calculators have it as a percentage.
The issue is a 3/2, 1000' unit that rents for $4k in San diego has very similar maintenance/cap ex as 3/2, 1000' in Peoria that may not rent for $1k. On this property in my market, I would have ~$450 allocated for maintenance/cap ex (varies depending on landscape, hardscape, flooring, fencing, HVAC vs furnace, roof type, and many other items). This is not a guess. I used to maintain a spreadsheet that calculated this based on lifetime and cost for each of my units. As my unit counts increased, I stopped the exercise but I know maintenance/cap ex is costly.. Here is an example that is more expensive in my market (so this one does not transfer well). A 40 gal water heater changed by licensed plumber in my market costs $1600. Unlike most parts, our water heater is more expensive because it is a different part than would be required in Midwest. $1600 / 12 years / 12 months is $11.11/month. A duplex has 2 kitchen (refrigerator, range, etc), water heaters, HVAC or furnace, 2x the bathrooms, etc. so a duplex has maintenance/cap ex much higher than a SFH. mintnnr/cap ex just on replacement is $22/month for a duplex. In reality there is likely to be a need to light the pilot a few times over 12 years. Occasionally an igniter goes, the TPR fails, the drain valve goes, or the thermal coupler. I had $18/month maintenance/cap ex for a water heater ($36 for 2 water heaters of a duplex).
Note using a percentage of rent would have the maintenance on a $1600 SFH the same as a duplex where each unit rents for $800 even though SFH has one kitchen, water heater, HVAC, etc but the duplex has 2 of each of those items.
Mike thinks 15% of rent would cover vacancy, maintenance/cap ex, misc (missed payments, asset protection (actually I am not surehebelieves in asset protection), utilities from property failure such as slab leak). So Mike has $120/month allocated. At 45%, the allocation would be $360/month (which I think is too low). Peoria Illinois vacancy rate is over 10% (10.4%) so $83 in this case. Mike would $37 for maintenance/cap ex etc. I would have $277 which is not enough in small unit count. So you would have an allocation in excess of 45% for this particular property (but maintenance/cap ex should not be based on a percentage of rent).
I am unsure how Mike has derived his maintenance/cap ex estimate, but I am curious. I know I have derived mine with a process that can be described and justified.
Peoria vacancy 10.4%:
https://www.rate.com/research/peoria-il#:~:text=Among%20Peoria%20residents%2C%20there%20is%20a%20homeowner%20vacancy,of%2010.4%25%20from%20a%20total%20of%2053%2C325%20units.
I recognize my underwriting many would consider conservative. I have yet to encounter an investor who has put forth the effort to determine a maintenance/cap ex that I have that thought my numbers are extremely conservative. In addition, I desire my underwriting to be a little on the conservative side and suggest this for all investors. It should take rare events such as Great Recession or Covid to under perform an underwriting.
Good luck
Hey Dan I want to clarify that I don't absolutely 100% disagree with the general *concept* of what you're doing here, although the end result is too conservative and will prevent you from making profitable investments, at least if it's the kind of stuff I invest in.
To be really honest, I didn't know this discussion was going to get so involved and I was not thinking deeply about my initial 15% figure. I was discussing this with Travis and he used it for his own rentals so I just did the same and spat out an example. In retrospect, it's low. I don't have my actual maintenance and vacancy numbers in front of me right now. I have been running probably 90-95% occupancy for the past couple years on my rentals in the Midwest, off the top of my head. Maintenance is NOT 35% no matter what your model may say. I'd need to really dig down to get you the appropriate number for my own rentals, but I can tell you right now that 25% for maintenance and vacancy combined is not too far off. Fannie Mae uses it and I've always found it appropriate for back of the envelope stuff. I have not taken this to the granular level that you are doing here. I understand your attempt to predict costs more accurately, but in the end, there may be a reason Fannie Mae does it the way they do it. You are overestimating these numbers.
Speculations as to why: tenants in these particular rentals may be tolerating a lower standard of maintenance than you think and thus everything wears longer than you think it will, I may have a different relationship with my maintenance people than you do (actually I don't let my management company do anything and I'm very involved in maintenance, I know how to do practically every necessary task, I manage people directly and sometimes I'll do a few things), there may be an error in your calculations such as you're assuming two units in a duplex don't share as much as they really do (they still share roofs, yards, and many other things), or something else entirely.
Either way, your numbers are way too high and I will not be able to answer why in more detail or provide you with my exact numbers without spending a significant amount of time on this. 25% ain't too far off. No way do rentals such as these have close to 45% vacancy and maintenance unless very badly managed.
Now, I'd love to hear how @Travis Biziorek got his 15%.