Hi. I have been seeing a lot of buzz on these forums about how operating expenses are approximately 50% of gross rents for the investor. I am wondering if that percentage is smaller if you are using a rent2own exit strategy instead of a long term buy and hold strategy. On a rent2own scenario the rent2owner pays for maintenance and repairs. Does anyone know the approximate operating expense percentage on a rent2own vs. a long term hold? Thank you very much.
Sonriffic
You can put anything in a lease, but in most states, the owner is required to maintain the property to a certain standard. You can not legally make the tenant responsible for that.
In reality, the operating expenses are the same. The vast majority of lease-option buyers never buy the property. If you require them to do the maintenance (despite the law to the contrary), you’ll usually get the place back with a lot of deferred maintenance or improper maintenance. Furthermore, if the tenant screws up maintenance and gets hurt, guess who will be responsible when you get sued?
Tenants are tenants. Calling them a buyer doesn’t change anything.
Mike
propertymanager is right but I use a rent to own type strategy and I find that there is a continuum of “tenants”. There is the guy that has been a homeowner in the past and has all the tools and loves to fix stuff up. Then there is the single mother who has lived in apartments all her life and doesn’t understand how a hammer works. There are people all along that line. When I screen the tenants I look for the handy guy that can do some repairs. I also provide them with a home warranty which gives them a $50 deductible and that gets major systems repaired. Also when I do my make ready I make the place brand new. That means new appliances, new paint and flooring. New stuff doesn’t break. This puts most repairs out into the 2 to 3 year time frame. By then I am either refinancing to pull out some money to do improvements or sell the house and 1031 into another property.
The 50% ratio buzz is most likely for the lower rent, high maintenance type tenants, in “section 8” areas. If I replace a refigerator with a new one for a SFH where the rent is $600, the price of the refigerator would not be three times as large if the rent runs $2,200 a month.
In fact, I have a SFH renting for $2,000 in an area where rents for SFH starts at $2,200. I charge below market rent, and becuase of it, I got tenants that stay for years, and rent it out in a few days when a tenant moves. In other words, little vacancy expense.
For instance, for the tax year 2005, landscaping cost $1,170 for this property, and repairs ran a mere $360.00, plus another $350 for a maintenace contract on the furnace and hot water tank. And when the tenant heard landscaping costs are going up, I was looking for a cheaper guy, they asked if they can do (have their teenage son) it for “free”, and if I keep the rent steady.
So for tax year 2006, I no longer have landscaping costs, as they’ll be paying for weed control etc. And the year before that, 2004, the tenant, fairly well to do, as I confirmed her salary on move in a close to $120K/year, volunteered to replace the range, dishwasher, washer, dryer and leave it there when they leave, if I replace the 20 year old refigerator with a new one. I agreed. So that was the extent of my repair expenses for 2004, the replacement refigerator. It was to their benfit to replace the washer dryer as the ones I supplied them was several years old, and they pay repair expenses below $200.00
So I never spent 50% of gross rent, or anywhere near $12,000/year for repairs. The only recent year that I spent that much was when I replaced the roof, siding on three sides of the house, all the windows in the front, all for about $12,000. That was in 2001, I thought of selling the place, and thanks to Osama, I took it off the market and the value climbed from 249K to a hight of 400K last year.
I know it’s not a money maker for someone paying market prices for it today. But since I paid 70K for it as a preforeclosure in 1983, I did very well with the appreciation, and got some good current cash flow to go with it.
With new appliances, service contract on the heating system, roof, siding a few years old, the tenant taking over responsibility for landscaping, I can’t see how a formula of 50% gross rents for repairs would apply to me.
It’s true, if I was paying 50% of gross rents for repairs, i would be losing money.
Frank,
I don’t think he was saying that 50% of the gross rents was going to repairs. He was saying that 50% of the gross rents are the average operating expenses, including taxes, insurance, managment, maintenance, advertising, legal fees, utilities paid by owner, landscaping, lawsuits, damage done by tenants (above deposit), capital expenses, vacancy allowance, etc, etc, et.
In actuality, throughout the United States, operating expenses run 45% to 50% of gross rents. Those numbers come from the big apartment association statistics.
Mike
Mike:
I thought he was talking strictly repairs.
Nevertheless. I found the operating expense ratio lower for me these days as rents have gone up. For the SFH where the market rent runs 42,200/month, the monthly escorw for taxes and insurance runs below $600.00/moth, or $7000/year, and repairs run $500/year at most. And at worst, I have a tenant moving in two years, with a 2 week vacancy, or less if I’m less choosy.
And the taxes for the SFH are considered high. In NYC, though RE taxes have gone up, still the annual RE tax on a 3 family runs about $4,000, with rent rolls exceeding 35K/year.
Nevertheless. I found the operating expense ratio lower for me these days as rents have gone up. For the SFH where the market rent runs 42,200/month, the monthly escorw for taxes and insurance runs below $600.00/moth,
…and that’s why I don’t live in NYC. How much would you have to make to pay rent of $42,200 per month??? I usually say OUCH!, but I don’t think that is strong enough in this case!!!
Mike
I thought the "$42,200/per month was a typo. WOW
That was a typo. It runs me $2,200 a month.