PM Leasing costs not included in the Rental Property Calculator?

Question

Hey hey...

I have been looking at multiple rental property cost analysis tools (because I'm an enginerd). I have noticed most tools include a large majority of the same numbers (MV, taxes, rent, etc) but when it comes to the details they can be different. One calculator includes capital improvements but doesn't include annual leasing costs or vice versa, etc.

I noticed the Bigger Pockets Rental Property Calculator doesn't include:

1. Annual Leasing costs for when a Property manager renews a lease for another year. For mine this is 1/2 of 1 month rent.

2. New tenant costs for when a Property manager markets and signs a new tenant. For mine this is 1 month rent. (this is included in the vacancy number?)

3. Turn-over costs (a part of maintenance?)

Are these included in another calculation or is it omitted? I am trying to understand which method is correct as I'm searching for properties. If I am looking at a duplex and one of my targets is $200 cash flow/mo this one omitted number can make a huge difference. If rent is $2200/mo then annual leasing cost is $1100. My cash flow would go from $2400/yr to $1300/yr. A potential stud to a dud according to the numbers.

Any info or advice would be greatly appreciated!

Brandon Sturgill · Answer

@Ray Johnson Well put sir...much more diplomatic than my standard advice that they are crap ;)

@Jeremy Sharp Eventually you'll need to build your own calculator based on your investing style an preferences...takes some time and effort, but it's worth it. Excell is a good starting point, but if you're looking for a more robust set of functions you'll need to move to a database...

Ray Johnson · Answer

@Jeremy Sharp I'm a Financial Analyst by trade and I've noticed many missing pieces in the calculators as well, I basically think the calculators were designed for the beginner to be able to quickly evaluate a property for a quick acquisition. The calculators are not designed to provide Quantitative and Qualitative analytics on a property for the long-term.

An example would be with the Rental Property calculator which allows you to maps out a 30 year chart, however it doesn't account for any rehab or interior upgrades that will take place over the 30 year hold period, yet the chart will tell you what your profits are at varying phases throughout that 30 year period. If you were using an IRR template for a 30 year Buy-and-Hold you'd show cost to rehab the property somewhere between years 12-15, and if you were going to really plan to hold at year 30 you'd show rehab/upgrade cost there as well, you'd also factor in a percentage of the cost of inflation for the rehabs, $5,000 for floors today most likely won't be $5,000 15 or 30 years from now.

Maybe we can get the Bigger Pockets leadership to provide a good IRR template so investors can plan a complete deal throughout the property holding lifecycle.

Brandon Sturgill · Answer

@Jeremy Sharp I think it's about customization for your focus and then maybe diversification by building out assumptions...there are constants as well...we're up to 93 data points on every MF property we look at...so your analysis can get crazy if you want it to...and truth be told, I don't even think we are scratching the surface of possibilities...one of the most important things to remember is underwriting deals is all made up...it's different for everyone...

Jeremy Sharp · Answer

Thanks for the confirmation @Ray Johnson and @Brandon Sturgill. I used one of the calculators that is in excel then basically added everything else that this particular calculator didn't include (cap improvement, Cap rate, NOI vs Mortgage, etc). I think my calculator is the most accurate but I just wanted a quick sanity check when comparing my numbers vs these other spreadsheets. They are all about 95% the exact same but that 5% seems to make or break most deals.

Jeremy Sharp · Answer

Hey @Aaron K. and @Ondrej Gargula,

Thanks for that information. It helps clarify a few items. My property manager is a little more expensive than what you've mentioned. From what I've seen it's about on par with other PM's in the area but they have also performed much better than many I've seen. I think it's a good place to start some negotiations though as I start to bring them more business.

Great point about the timing for lease renewals. I just ran into that this year where I had a 2 bedroom unit open up in April but didn't rent out until August. The area I'm in is a lot of young professionals who I've noticed are still on the "college rental schedule" even a few years after they've graduated. It was a learning moment for me.

What do you use for vacancy rate then? I'm around 6%. Is that around what you are at as well?

Ondrej Gargula · Answer

Hey @Jeremy Sharp, I am not sure how PMs in Ohio operate but as a property manager in Lubbock, TX here is what my standard agreement would look like and the costs you need to include in your calculations if you will be using a PM.

Management Fee: 8 -12% of collected monthly rent. Depends on number of units, location of the units and few other factors.

Leasing Fee: 50% of 1 full month rent. I state full month because if we use some Move-in specials to attract more tenants (ex.1st month half off) the leasing fee is calculated from the regular rent.

Renewal Fee: I have been playing with this one little bit but generally it is 25% of 1 month rent. I have also used a flat fee before $150 - $250 just because it takes the same amount of work to renew a tenant on a nice unit as it does on a rougher one. Also, I have owners that really want to include the renewal fee as a initiative to renew.

Cost of a "Make-Ready": Now this one really depends on the previous tenants, what type of a unit this is, and your PM ability to screen and only approve good tenants. If you are in good shape there, the Security Deposit will cover your carpet cleaning and everything that is not a regular wear and tear. You will be left with rekeying, part of the cost of a cleaning crew and the wear and tear such as little touch ups.

Vacancies: Just a tip here. Operating in a College town one thing that helps me to lower vacancy rates is to set up leases so that we renew in late Spring or in the Summer.

I know that some other PMs have some other charges like trip charges, marketing extra charges, maintenance up-charge and I don't know what else. I personally thing those are not fair to investors. Management/Leasing/Renewal fee thats it in my view!

Hope this helps

Aaron K. · Answer

Turnover costs are typically included in maintenance

Not all PMs charge lease renewal fees for existing tenants and I would try to avoid that fee if possible

Marketing costs should be included in a leasing fee (for new tenants) not separate and should be included in vacancy costs

PM Leasing costs not included in the Rental Property Calculator?

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