First let’s assume that operating expenses overtime will be 50% of gross rents (Propertymanager’s formula). If you have a property that is running with lower expenses - let’s say 25% of gross rents for a few years. Based on the 50% assumption above, it would mean that sometime in the future you would have a major expense with the property that would bring the average operating expenses closer to the 50%. Would it be wise to sell the property and get another one before that major expense?
So bottom line - would it be wise to identify your properties that have low operating expenses and sell them every few years. Using the same logic, you should keep your losers (properties with high operating expenses because chances are that you will have lower expenses in the future…).
I guess this is similar to stock investing - sell your good performers and keep the losers… :O)
Just thought about sharing this thought and see what do you think? :O) Have a great Sunday!
First of all, I would love to see the breakdown of anyone that is claiming expenses of only 25%. That’s just living in fantasy land. When you consider that management is usually 10% and maintenance can be 10%, that’s 20% already. Throw in taxes and insurance, and you’re already well over 25%. That still leaves you advertising, entity maintenance, legal fees, evictions, vacancies, damage done by tenants in excess of the security deposit, capital expenses (not technically an operating expense, etc, etc, etc. Twenty five percent - not in the real world!
Buying right, with a thorough understanding of income and expense issues, is the key to success. Selling a property based on a statistical anomaly would be crazy.
Unless you’ve bought a real lemon, the big difference in rental expenses is tenant behavior.
If you make a mistake and buy a house with a lot of unexpected deferred maintenance, That one is going to be expensive for the first year, but once it is fixed, the structural problems should be over.
Each rental should have similar expenses in taxes, insurance, regular maintenance costs.
Some times you get a house that just won’t attract good tenants. That one will have higher expenses from longer vacancies and tenant damage. To me, it makes more sense to get rid of that one.
If a house appeals to decent tenants, it is going to have less vacant time, and good tenants do less damage. That one is a keeper. Being trouble-free doesn’t make it one to get rid of.
Big routine expenses aren’t going to vary from house to house all that much. Every house is going to need a new furnace every so many years. Every house is going to need a new roof every now and again.
However, I’ve seen investors use a variation of your plan where they buy brand new houses and sell them after 5 years. They figure they can get rid of them before systems replacement starts. Me, I just budget for maintenance and if I have a good house that is doing well, I just pay for the upkeep.