Underwriting Multi family units

[Anthony Aguillard]

What underwriting rules do u apply when assessing mf complexes?  I heard management is 10%, vacancy is 10%, what maintenance percentage, etc?  

TIA

[Evan Polaski]

@Anthony Aguillard, as others noted: there is no one size fits all.  Management, for instance, is commonly 10% if you are looking at small deals, and can be as low as 2.5% for large deals.  But large deals will have payroll as a separate line item.  

Vacancy may be 2% or 10% or 5%.  The biggest driver of vacancy, in my experience is you or your manager, but also the quality of tenant and availability of contractors.  I have never turned a unit that didn't need some work: paint touch ups, deep cleaning, maybe some capex items.  If a tenant stays only 12 months, and then it takes a month to fix, clean and get next tenant in, that is 8.33% vacancy.  5% would imply that you are down about 1 month every 2 years.  I find in lower end areas, the tenants turn over more frequently.

As for Maintenance and Capex: again it depends on current condition of property, rent level of property, and generally how you want to handle things. But I will remind you, an HVAC replacement is likely going to cost almost the same for a $500/mo area as it will for a $3,000/mo area. So using percentages is irrelevant. I ran a capex calculation that my single family rentals needs AT LEAST $400/mo of Capex reserves to replace everything at the end of its useful life. I new roof will need replaced in 25 yrs. If that roof is going to cost $6,000, you need $20/mo every month for 25 yrs to have $6k saved. Kitchens need redone every 15ish years to keep up stylistically and get top rents. $20k for a full kitchen in my houses (cabinets, counters, backsplash, appliances, flooring, paint, etc): $110/mo. You get the idea. And that is assuming things are new now.

Repairs/maintenance are often directly tied to capex: a new HVAC will likely have lower maintenance costs than old.  Appliances are the same, etc.  If you have things like deck or fences, often the repair is replacement, so I just lump capex and maintenance together for the most part from a budget standpoint (not for taxes).