Account for Vacancy, Repairs, & CapEx in Cash Flow Analysis?

Question

Hi,

When you're determining the potential cash flow of a prospective investment property, do you include repair, vacancy, and cap ex allocations?

Right now, I'm accounting for the rent, then subtracting mortgage, RE taxes, insurance, and property management.

ALSO, if you do or do not, what are the numbers you look for? I hear $100-200 positive cash flow as a goal from a lot of people on here, but I'm unsure if this is including repair, vacancy, and potentially CapEx.

Mitch Messer · Answer

Hi @Aaron Moayed and welcome to BiggerPockets!

Yes, when considering potential cash flow, I look at every expense that has the potential to take actual dollars out of my pocket. That includes repairs, vacancy, cap ex, and property management.

Your mileage may vary, but I use:

• Repairs - 0.5 * Rent
• Vacancy - I am very conservative here. I assume one month vacant out of 12, or 8.3% * Rent
• Cap Ex - We typically do renovations upon acquisition, and then hold for 5 - 10 years or less, so our ongoing Cap Ex tends to be small. Say 0.25 * Rent
• Property Management - In our market, 9-10% * Rent is standard

And yes, I generally want to see at least $200/mo in cash flow.

Mitch Messer · Answer

@Aaron Moayed

Most of the buyers I'm working with are purchasing with cash, but yes, a mortgage payment will definitely count against cash flow.

Also, that 0.5 was not a percentage: My annual repair estimate is equal to half a month's rent.

CJ M. · Answer

@Aaron Moayed

For my rehabbed properties, I assume 25% of gross rents for repairs & maintenance, capex, and vacancies (I self manage). While everyone's situation and goals are different, I look for $200+/mo in cash flow if I'm using leverage. Hope this helps.

Anthony Wick · Answer

@Aaron Moayed

So many variables. Yes, you must include these

expenses. And include mgmt fee even if self managing. Probably won’t self manage forever, or you should be paying yourself eventually.

I use 3% vacancy, 5% maintenance, 5% capex, 7% mgmt fee. So, 20% of rents as reserves/expenses. However, it always depends on the shape of your property and age of big ticket items like roof, Hvac, etc. If you buy a property with 30 year old roof and 20 year old mechanicals you better be holding out some serious cash for those soon to be repairs.

Around here, I’ve been getting about 1% or so rents to purchase price. But my tenants pay all utilities, garbage, mow lawns, shovel own snow, so just PITI and reserves for me.

Wiley Strahan · Answer

@Aaron Moayed - @Mitch Messer had some good advice with his assumptions. To go even further, your capex and repair assumptions are going to be based on a few things.

1) Age of the building - the older the building, generally the higher the repair expenses

2) What repairs are you doing to the building - if you are renovating the entire building from top to bottom, you may want to be less conservative on the repair assumptions as everything will be brand new

3) How conservative are you as an investor - some people will model properties out with zero room for error and they may assume a lower repair cost that you will

4) What is your end game - if you are going to hold the property long term, I would assume higher repair costs as compared to a fix and flip that you will dispose of in a few months.

Let me know if you have questions.

Tim Herman · Answer

@Aaron Moayed do you want the property to pay for itself? You have to account for all costs of the property. CA is hard to find cash flowing properties if you include all expenses. Good luck

Simon W. · Answer

As an accountant, Cash Flow will include mortgage payments

Aaron Moayed · Answer

@Mitch Messer - Hi, Mitch! Thanks for your response. So do you use a mortgage to purchase or pay in cash? Do you factor in mortgage if you use it?

Only half of a percent in repairs? Does this usually end up being the case for your properties?

Michele Wax · Answer

Usually you take 10% for repairs and maintenance etc., but your property manager is doing what?  and how much are you paying them? Can you manage it yourself?

And anything that puts $ in your pocket every month is a good investment. As you are getting $ in your pocket and paying the mortgage on the property.

Tag me if you have any further questions.

Account for Vacancy, Repairs, & CapEx in Cash Flow Analysis?

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