estimated @ 50% of Gross revenue?
also are you guys estimating vacancy @ 90% of revenue of full occupancy?
Do these estimated #s include savings for Capital expense? What is a usual % for Capital expense?
reviewing a deal for small apartment complex…
Thanks
Hi,
Vacancy is what ever your town, city or county average vacancy rate is!
I generally take 50% of my adjusted gross income for expenses (50%) and net operating income (Debt Service & Cash Flow) (50%).
If a building is 100% vacant it does not mean there are no expenses!
Yes, however that number is based on age of each conponent that create the overall capital expense budget! Like I tell the students I mentor the 50% for expenses is either spent or saved, but if unspent it does not become part of your Ferrari fund as every dollar alotted to expenses if not spent needs to be saved for future expenditures!
Good luck,
GR
WHAT I can’t put all that cash towards my new toy fund??!!? I love that. I am going to steal that to use in the future.
50% expenses is a safe starting place for the average residential income deal.
However, we’re talking ‘average.’ If the property is old, the expenses might climb well above 50%. If the rents are cheap, and the property is old, the expenses might climb over 60%.
It’s about both age and price point.
The most commonly overlooked expense is management.
And the most misunderstood expense seems to be replacement and reserves, if not ongoing maintenance.
I figure 3% for replacements, regardless of what happens in any given year. Maintenance reserves need to be built up and maintained, since some costs don’t show up for maybe five years. This doesn’t include roof replacement. Capital improvement are in a class by themselves and should be accounted for at the get-go, not half-way into your investment period.
Roofs may require a ten year amortization period. So, if a roof costs say $3,000, and it needs replacement in say 10 years, then we save enough over 10 years to meet that nut. That’s $300/yr, or $25/mo. Of course that doesn’t account for inflation. So, add at least 3% per year, compounded to the costs and see what you get. The future, inflation adjusted figures always seem high, until the day comes.
FWIW