Estimating Operating Expenses

[Eric Lopez]

To my BP family,

When I am running my pro forma on a potential investment property, I always get stuck on whether or not my expense numbers are correct. I can accurately estimate utility costs as most util companies have estimated usages and amounts on their websites, but costs like maintenance, CapEx, make ready, etc., are much harder to estimate. Without having actual numbers to use at my fingertips, how do you accurately (as best as you can) estimate these expenses?

Thanks!

[Sean Barnebey]

Hey Eric!

Great question! Accurately estimating expenses like maintenance, CapEx, and make-ready costs is a common challenge, especially for new or prospective investment properties. While there's no perfect formula, there are a few methods you can use to get as close as possible:

For maintenance and repairs, a good rule of thumb is to budget 1%–2% of the property’s value annually. For example, a $200,000 property might require $2,000–$4,000 per year. This can vary based on the property’s age, condition, and type, so adjust accordingly. If it’s an older property or has deferred maintenance, you might want to lean toward the higher end.

When it comes to CapEx (capital expenditures), planning for major replacements like roofs, HVAC systems, and appliances is key. Many investors budget an additional 5%–10% of gross rental income for CapEx, though this too depends on the property's condition and the age of major systems. Conducting a thorough property inspection or consulting a contractor can help identify potential large-ticket items you might need to replace soon.

For make-ready costs, you can look at local averages for common turnover tasks like repainting, carpet cleaning, or minor repairs. A good ballpark is $1,000–$2,500 per unit, but this depends heavily on how extensive the turnover is and whether you’re self-managing or hiring contractors.

If you’re looking for more precision, connecting with local property managers or contractors can provide insight into typical costs for properties like yours in the area. They’re often familiar with market-specific expenses and can help validate your estimates.

Lastly, as you analyze more deals, keep track of actual expenses on your properties or properties you’ve researched. Over time, you’ll build a more accurate dataset tailored to your portfolio.

Hope this helps—getting these numbers right is an ongoing process, and you’re asking all the right questions to set yourself up for success!