Operating expenses for good deals

[Jennie Jones]

My husband and I want to purchase a 2nd rental property. We have been listening to the podcast and reading the books. It seems like the advice when running the calculators is to budget $100 per unit each for cap ex, management fees, and maintenance and 5% for vacancy. Is this what others are doing?

We have run between 10-15 properties and have yet to find one that flows when using these percentages. Have we just not run numbers on enough properties yet?

Is it dangerous to lower the percentages for these operating expenses?

[James Ma]

Its likely you may live in a market where there is not any cashflowing properties. I have to buy an hour out from where I live to find them and they had increased in value to the point where it wasn't cashflowing anymore to continue buying there.

- Definitely keep the 5% vacancy rate in your calculations unless its an affluent area with my high quality tenants.

- I usually calculate $50 each month to cover maintenance and repairs on the property (its a condominium so I dont need to pay for roofing or exterior work or I would set aside a lot more)

- include any other expenses such as condo fees, Insurance, utilities, property taxes, etc. and break it down into a monthly cost (ie. $1500 property tax would be a $125/mo expense)

- Ideally you want to be able to budget in an expense for property management (~8% monthly rent) but I found this didnt work for the numbers and I was willing to take it on myself so left it off my spreadsheet

The numbers are there to guide you in your expected cashflow and how much it will impact you if you're wrong will depend on your own personal situation. If rents drop 10%, you incur higher property taxes, need to replace appliances, insurances go up etc. do you have the income to support covering that.

Personally I love being at least neutral cash flow each month so I don't need to worry as much about paying out of pocket to keep the investments afloat and less risk to my own finances and lifestyle