Cash flow Cap X, repairs, and maintenance - suggested percentages of 10% realistic?

Question

I am deep in analysis paralysis trying to find properties in my local market that will cash flow at least a little bit for a combined buy and hold + cash flow strategy. I know the market is not what it used to be, but it seems like I can't ever come out ahead. I have one property that was a house hack that I kept when I moved out of state. It cash flows but because it is recently renovated there is little to no ongoing maintenance and I know exactly what cap X category things will need done in the next 10 year. But I'm having trouble gauging other properties with these things in mind. Even if I scored a deal for waaaaaay under asking the numbers just don't seem to work. What's a good real world estimate for these expenses?

Secondly, I don't understand how the 1% rule is such a standard if it doesn't account for what the mortgage is. Am I missing something?

Secondly, I don't understand how the 1% rule is such a standard if it doesn't account for what the mortgage is. Am I missing something?

Laura Casner · Answer

@Michael Smythe  This is something I knew with logic but didn't have the terms to support. Thanks!

Michael Smythe · Answer

@Laura Casner DANGER, DANGER:)

Just trying to get your attention because your Maintenance Factor really depends on the Class of the property!

Why you ask?

A Class A property is typically in great shape and attracts great tenants that will usually take great care of it. You'll find many posts here on BP that recommend only 5% for MNT Reserve.

But that 5% won't work on lower class properties.

We recommend:

Class B - 10%

Class C - 20%

Travis Biziorek · Answer

Yes, I take those three and put them under one line item at 20% gross rents.

The idea here isn't to break it all out into three line items and deliberate on what percentage should be assigned to each. That's too granular for me, and perfection is the enemy of progress.

Laura Casner · Answer

@Mathios Yonan Thank you for the input!  Confirms my thoughts and that I'm on the right track.

Laura Casner · Answer

@Travis Biziorek Thanks for all those details!  It all confirms where my head is at. When you say "I generally use 20% for capex, maintenance, and vacancy" Do you mean you budget 20% total of gross rent or 20% for each??  I assume total and I think this is where I'm making a mistake - when bigger pockets calculators ask for all three of those I add 10% for each which might be why nothing is working out...

Jeff S. · Answer

@Laura Casner there is also the 50% rule. Both the 1% and 50% rules are not rules because a $10,000 roof on a $90,000 property is a lot more painful than on a $500,000 place. These rules are "back of a napkin" place to start and adjust accordingly. I used to figure 1/2 of 1% was decent and came close to penciling with rates at 3%.

A lot has to do with how you get repairs done. If contractors are really busy and shoot you high bids you can be sunk before you start.

With higher rates lower prices are a requirement.

Travis Biziorek · Answer

Hey Laura, all great questions and the fact that you're hitting roadblocks means you're doing things right.

This is exactly what happened to me when I thought I wanted to invest in Ann Arbor in 2019. The numbers "worked" (to some degree" but I just didn't like the idea of spending $200,000+ on a home to cash flow $100/mo.

I ended up shifting my focus to Detroit proper where the numbers looked better on paper. I proceeded with caution, initially, to make sure reality would match with my assumptions. Flash forward and I have 12-doors in Detroit that kick off a ton of net cash flow and I used it to move back to California.

I generally use 20% for capex, maintenance, and vacancy. This may be a bit high but I prefer it and I'd caution against justify moving the number lower and lower. You'd likely be doing it to try and justify a deal.

Pick a number and stick to it whether it's 15% or 20% or something in the middle. But I think below that and it gets dicy.

Regarding the 1% rule... it's garbage. It kind of worked years ago but even still... if you don't understand your actual numbers and running them for every deal you're just being lazy and doing yourself a disservice.

In its defense, the 1% rule was never meant to be an actual rule. It was an easy way to see, at a glance, if a deal warrants further investigation. You still need to know your actual costs including debt servicing, taxes, capex, etc.

Today, the 1% rule really doesn't make sense anywhere largely because interest rates are higher than they've been in decades. If you want to use a rule of thumb like that you're going to need to move it up to 1.5% or higher.

In the end, it's better to just find a market that will work for you, understand it intimately (or work with someone who does) and come up with a buy box.

For example, I generally know that in Detroit I'm looking for SFH's in the $70k-$90k range all-in (including a cosmetic rehab). Rents will be $1,100-$1,400 depending on location and strength of the area.

If it fits those ranges and it's in an area I deem a good investment I'll dig further on the actual numbers.

That's always going to be the best way to analyze deals. Hope it helps!

Mathios Yonan · Answer

Laura, I'd suggest at least a ballpark of 15% gross income per month to go towards expenses is what I believe is a quick way to analyze.

1% rule - as for the 1% rule, this is a rule of thumb for homes that are cheaper to buy compared to homes that are in California for example. The 1% does I've seen doesn't work with homes worth over 500k and isn't meant to be used that much, it's just a simple calculation to see if the property is worth your time.