Maintenance and capital expenditures: MF

Multi-Family and Apartment Investing
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Maintenance and capital expenditures: MF

Account Closed
Salt Lake City, UT · Member since 2013 · 43 posts · 2 votes

I am very excited (and very anxious) about getting close to purchasing a MF property. I am analyzing a half dozen MF properties (15-60 units) and going over some spreadsheet analyses. I have gone through BP forums for a few hours trying to find some definite answer to the question I have, with little consensus.

My question: When estimating expenses on class C/C+ multifamily, what proportion of rent (or cost per unit) do you suggest using for maintenance and capex?

I am looking at properties close to turnkey. So, assume the property is all fixed up. Let's say it was built in '72, is in good shape and tenants are pretty reasonable blue collar folks.

For capex: I understand that when doing an inspection it is best to look at all major systems (appliances, boiler, roof, etc) and figure out the remaining life and save accordingly. But in the initial analysis before an inspection would a reasonable estimate be about 5%?

And, for maintenance (not capex), how much do you estimate? This would be for daily repairs (fixing a pipe, painting between tenants, broken lock, cracked window, electrical short, etc, etc). This should be for parts and labor. I know this is dependent on many factors, but what do you believe is the ballpark range?

Thank you,

Jeffrey Kovnick

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Giovanni Isaksen
Investor · Bellingham, WA · Member since 2010 · 308 posts · 230 votes
12y

Just to add to @Jeff Greenberg's comment on capex, don't rely on a lender's replacement reserve requirement to figure how much to budget. Banks often require $250/unit but in the Seattle area for instance, properties are actually spending $450 on average according to market research.

When we build a proforma for a property we're interested in we add capex based on our estimate of everything we can see (I love Google Earth and Bing) like roof, windows, landscaping, parking lot and ballpark for everything we can't like central heat. Everything wears out and we've found if you don't include a line item in your capex for something, down the road it will be an expensive surprise.

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  • Jeff Greenberg
    Real Estate Consultant · Camarillo, CA · Member since 2010 · 2k+ posts · 1k+ votes
    12y

    Jeff,

    There are many rules of thumb floating around 50% expense ratio or 60% if all bills paid. If you want to break it out a little you can go with 400-600 per door for R&M but add another 100/door for flat roofs and another 100/door if it has a chiller. Stick with the higher end on older properties. As for capex I would budget 350-450/door. Lender requirements vary on what they will require.

    Just looking at our current 60 unit acqusition our R&M budget is coming in at 7.5% of GSR.

    Each community will vary due to the cost of living in the area, but I hope that this gives you some help.

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  • Vince Greenland
    Investor · Duncansville, PA · Member since 2011 · 26 posts · 5 votes
    12y

    I think it depends on the property and number of units and your overall situation. In general for smaller complexes, I use 5% maintenance (includes supplies and labor) of the gross income. I also use 5% vacancy rate and a 10% cap rate? In my area 5% vacancy is high, so I know that is a small factor of safety.

    I have never bought anything over a 17 unit complex, so I have never used a capital expense figure. I have used this formula for several years, but in the beginning I did the work myself so the labor was lower. As the years progressed, I hired a full time employees and a painter on an as needed basis. I still use the same formula and continue to do well.

    I think the important thing to consider is cash flow, which relates to the cap rate . In my formula, the property has to cash flow or cash flow in a reasonable amount of time due to management. however, I typically do not take any money out of the business as it is for college education for my children. therefore, I am putting everything back into the properties which covers the capital expenditures that are needed. so if you want/need a certain amount of income I would add a cap expense and increase the maintenance.

    I am currently looking at a 96 unit class c property that appears to be similar to your example. Due to the number of units, I am including a $30k capital expense figure. however the property has a 13% cap rate, which means it is making more money. therefore, as stated above, I'm not taking any money out, and will spend more than that to improve the property as I lower the vacancy.

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  • Giovanni Isaksen
    Investor · Bellingham, WA · Member since 2010 · 308 posts · 230 votes
    12y

    Just to add to @Jeff Greenberg's comment on capex, don't rely on a lender's replacement reserve requirement to figure how much to budget. Banks often require $250/unit but in the Seattle area for instance, properties are actually spending $450 on average according to market research.

    When we build a proforma for a property we're interested in we add capex based on our estimate of everything we can see (I love Google Earth and Bing) like roof, windows, landscaping, parking lot and ballpark for everything we can't like central heat. Everything wears out and we've found if you don't include a line item in your capex for something, down the road it will be an expensive surprise.

    1Reply
  • Zach Schwarzmiller
    Investor · Snohomish, WA · Member since 2013 · 629 posts · 84 votes
    12y

    Giovanni has a great point for that - the bank/appraiser standard can often be much lower than what is required. Depends on the buildings age and condition. When I underwrite I use between $300-500/unit/year as well typically.

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  • Michael BlankPro Member
    Rental Property Investor · Atlanta GA · Member since 2013 · 85 posts · 82 votes
    12y

    Jeff, assuming the property is turnkey and doesn't require any deferred maintenance to be taken care of, I use $250/door for capital reserve per year and 10% of income for repairs and maintenance for a C/C+ property.

    Michael

    Podcast Guest on Show #324
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