Modeling expenses & capex, best ways to estimate?

Question

Hi all,

I'm looking at buying a primary residence with a goal of renting it out when I leave the area.  This is a high COL area though (DC/NoVA), so trying to get a rough sense of how much negative cashflow I'd have when I leave.

Vacancies, prop management, insurance, etc are all pretty easy to estimate, but I have no idea how to properly estimate capex.

For example, let's take a theoretical older property:

PITI:  $400k condo @ 5.75% interest rate, 20% down.  $150 HOA fee.

Assuming 1% property tax, $800/year insurance, no PMI = $2417 per month

Income: Expected rent of $2200 ($26.4k per year)

Expenses:

- 8% vacancy (-$2112)

- 8% prop management (-$2112)

- How much for capex/maintenance? A $3500 hvac unit over 20 years is only $175 per year.  Roof would be covered by HOA.  Dishwasher/refrigerator/washer/dryer is maybe another $175 per year.  Misc small repairs of $500 per year?  That puts capex+maintenance at $850, which is a lot smaller than the 50% rule which in this case would be $1200.  (-$500)

- Maybe $1k per year in marketing/legal fees (-$1000)

Total delta would be $26400 - $2417*12(PITI) - $2112 - $2112 - $500 - $1000 ~ -$8k per year, not accounting for any depreciation benefits.

Does this look in the ballpark of what I'd expect?  Go higher or lower on capex/maintenance?

Ray Johnson · Answer

@Neil Quinn I own several properties in Washington, DC. you're numbers are very low on several items

1) property taxes are going to be higher

2) What area are you looking at for a property? The HOA fees will vary, As long as you stay away from the high-rise condo projects you can stay fairly low, however $150 is too low for any of the nicer areas of DC

3) Also if you're paying $400K for the condo, Are you in Northeast, DC or is this a 1 bedroom in Northwest DC. If you're looking in Southeast or Southwest DC, vet the HOA's as many are very delinquent which don't allow for financing causing them to basically be apartment building owned by individual investors.

4) I would advise looking in an area of Northeast DC that sits up against Northwest DC as that area has better growth potential without the risk associated with SE and SW

5) Your Cap number can be smaller if you get a rehabbed condo as items like Dishwasher, Refrigerator, Stove, Washer & Dryer will all be new like the condos I do. Cap-Ex will be geared towards HVAC as it is not included in the HOA, and some Misc repairs.

6) To minimize your vacancy, try to be near one of the Metro lines for commuting purposes

7) Also on the Rent, You can get $2,200 in NW, but finding a $400K condo with a low HOA will be hard since the investor price point for the NW neighborhood with low HOA's start around the $450K, The closer you are to the Metro the higher the prices are going to be.

Neil Quinn · Answer

Thanks for the reply Ray.  These are -very- rough numbers I started to give me a sense of how negative I might be.  To answer your questions:

1.  Focusing on Northern Virginia rather than DC for better landlord laws and prices.

2.  Was trying to find townhouses with lower HOA fees ($100-$300) rather than condos near metros where HOA fees would kill me ($400-$700)

3.  As mentioned, looking in NoVA where I could hopefully find something bigger, at least a 2 bed.

4.  If I was going to invest in DC I agree with NE.  The tenant rights absolutely terrify me as a possible future landlord though.  So many horror stories about DC.

5.  Right, I assume HOA will decrease capex because of the shared costs

6.  RE: Metro I'm having a hard time deciding.  It definitely would reduce vacancy, and probably appreciate better over the long term, but seems like trying to find one that could cash-flow positively is near impossible.

7. My total budget is flexible - prob could do 400-600k or so, but was hoping to keep the deal on the smaller side.  I'd only up my budget if it meant moving from negative/even cashflow to a more positive cashflow.

I'm quite flexible at this point and trying to balance up front cost/cash-flow vs. long term appreciation and rent growth.

Amanda G. · Answer

1k for marketing and legal seems high. Especially since you have a property manager listed. What would that cover?

Cap ex estimates go from 8 - 12 % (from what I've seen). Really it is about having reserves for when the big thing breaks. Will you really have 8% vacancy in your area? How high is demand where you are? You may be able to estimate that lower, I have friends who have a vacancy every couple of years on a SFR, usually they have a tenant immediately after the first one because of demand and good management.I'll ask the question that a lot of people here will- why settle for negative, when you can find a friendlier market that will cash flow now? Consider your big picture and the opportunity costs.