Need help with number crunching formula.

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Need help with number crunching formula.

Michael Randle
Aurora, CO · Member since 2016 · 158 posts · 118 votes

Hello BP,

I need some help with numbers and my thought process. I have owned 2 investment properties, but those where kind of accidental and hobbies rather than a business. Something fun and interesting to make some side cash.

Now I am transitioning into a more serious approach and I am in the process of  crunching massive amounts of numbers and I  wanted to get input on my process and let some more eyes look over the numbers and see where my logic is breaking down.

I am using a formula of 20% down, 4.875% Interest 30 year fixed, 10% CapEx, Repairs, VacRate, PropMgT. All cash flow is diverted to a 6 month reserve at which time everything extra then comes to me as cash flow.

First, what is wrong with the above approach? I know I can adjust some of the CapEx, repairs or Vac rate up or down if needed, but 10% is generally a good rule of thumb for number crunching.

Second, do any other investors have a 6 month reserve fund that they stop funding or do you just constantly roll in your CapEx and Repairs accounts?

Third, and I suspect it is because of the MLS, why am I unable to find any sort of deal using the formula? It seems like off market deals are the only deals that will make sense to me.

Thanks!

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Chad Kastel
Rental Property Investor · NY · Member since 2018 · 126 posts · 42 votes
7y

@Michael Randle.    Cap Ex is going to be subjective.  Depends on the age of the property and what repairs it needs done.   I've been using 5% but I don't think 10% is wrong.   Vacancy rate can be determined using the data that craig's list or zillow presents.  You can also create "dummy" adds on craigs list to see if the price point you are advertising for rent will actually be attainable, you can base your vacancy based on that and the type of tenant you may obtain.  I've been using between 5-10% depending on the neighborhood.

6 months is conservative. Three month is the supposed minimum.  The more properties you have can push the number down, if you had 100 properties maybe 4.5 months on average is fine.   For now 6 months probably gives you the most leeway to make mistakes and for bad things to happen (and for you to worry a lot less).

In terms of the MLS, where are you living? I know in Florida I could not find cash flowing deals using a similar Florida, But I've been able to use the MLS in other states.

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  • Chad Kastel
    Rental Property Investor · NY · Member since 2018 · 126 posts · 42 votes
    7y

    @Michael Randle.    Cap Ex is going to be subjective.  Depends on the age of the property and what repairs it needs done.   I've been using 5% but I don't think 10% is wrong.   Vacancy rate can be determined using the data that craig's list or zillow presents.  You can also create "dummy" adds on craigs list to see if the price point you are advertising for rent will actually be attainable, you can base your vacancy based on that and the type of tenant you may obtain.  I've been using between 5-10% depending on the neighborhood.

    6 months is conservative. Three month is the supposed minimum.  The more properties you have can push the number down, if you had 100 properties maybe 4.5 months on average is fine.   For now 6 months probably gives you the most leeway to make mistakes and for bad things to happen (and for you to worry a lot less).

    In terms of the MLS, where are you living? I know in Florida I could not find cash flowing deals using a similar Florida, But I've been able to use the MLS in other states.

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  • Ryan SajderaBusiness Member
    Realtor · Manhattan, KS · Member since 2016 · 170 posts · 89 votes
    7y

    Hey Michael,

    Personally, I roll all of my capex into the same account as the rest of the cash flow. I dont “escrow” anything for capex and repairs, but I also roll all of my cash flow back back into my business.  10% is a good rule of thumb but there are a lot of factors to consider like age, size, #of units, etc. Replacing a roof on a 10 unit apartment under one roof is likely cheaper to replace than 5 duplex roofs, so that may affect how much you need to set aside.  Does that make sense? Your capex is still your cash flow until you spend it on repairs or improvements etc. i like to have enough in a savings to cover at least 3 major repairs at any given time. The rest I will sometimes pull out to put into another property and then use that cash flow to help build the account back up. Rinse and repeat. Some budget by unit, some budget by building etc. just be conservative in your estimates so you don’t get surprised later, but not so conservative that it’s keeping you from ever having numbers that work.

    As far as percentages go, I typically use the following but are ALL subject to the specific deal the are budgeted for.

    Repairs/CAPEX: 10-15%

    Management 8-12% (usually 10%) 

    Vacancy 5-8% (area dependent)

    25% down (always be prepared to do this-twice banks have needed 25% down from me instead of the original 20% agreed upon)

    5% interest (changes with the current rates)

    Don’t forget to budget for things like insurance, hoa fees, lawn care/snow removal, taxes, and CLOSING COSTS. 

    Ryan  

    [email protected]
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  • Michael Randle
    OP
    Aurora, CO · Member since 2016 · 158 posts · 118 votes
    7y

    Hey Ryan,

    It lookes like we are fairly on the same waive lenghts when it comes to the basics, just a little different in the details. I go for the saving upfront and cash flow in the back side. Where it seems you roll all cashflow forward back into your buisness.

    I do have to ask if having Repairs/CAPEX in the same line item, even tho it can be at 15%. Vs Repairs 10% CapEx 10% has ever been an issue.

    Also, I have always been asked to show 6 months of liquid funds to close on a house, which is why I have that 6 month minimum. Have you found that this isn't the case for you?

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  • Ryan SajderaBusiness Member
    Realtor · Manhattan, KS · Member since 2016 · 170 posts · 89 votes
    7y

    That’s interesting, I can’t say that I’ve run into that yet, but it makes sense to save up an account if that is a requirement for your bank!

    I haven't had an issue budgeting it in the same line item. At the end of the day its just a pot of money to pay for things that don't seem to go right! Lol. We formed our LLC this year and will be budgeting everything through a business account, so that may change things for us. We are working with our CPA to get our ducks in a row regarding our business bank accounts and how repairs etc need to be routed. Hope that helps!

    [email protected]
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