Balancing Profit

[Joshua Fair]

Current mortgage on house with taxes and insurance is $800.00 I can currently rent my house for $1,400.00.

How much of the $600.00 would you put towards expenses and how much would you take for profit. What formula have most used and had good success with?

[Shawn Thom]

for repairs, I think it will depend a lot on your house. IF you have a new AC, new roof, new plumbing etc etc you may have less maintenance costs for replacements in the short term. If your stuff is old, that will be a different story. Regardless, I am saving for major items.

I've been taking out $75 for maintenance which in my case i think will be a little high in the near term as I did pretty extensive rehabs, no carpet & pretty decent bullet proofing, and 10% for vacancy.

My rents are 900-1000.

[David J.]

It's all profit until it turns into an expense. If your asking how much you should save for a safety net or for capital expenditures that is another story. I would save it all until I could sleep at night knowing I have enough money in the bank to cover the worst case scenario.

According to a common "formula" used on BP (50%), you would divide the 1,400 in half to get your expected non-financing expenses (everything but P&I). From that 700 you would deduct the non-financing expenses you already paid (taxes and insurance) and the remaining amount would be the general rule of thumb for stocking away cash for capital expenditures.

This will generally work unless you gat a rainy day in the first few years and the raining day fund is not large enough to cover. For example, if you decide to save $300 a month you will not be able to sleep at night for 2 years (the amount of time needed to safe for a roof). That is why I would sock it all away.

[Eddie Werner]

What are the expenses not paid by the tenant? If tenant pays all expenses then put 10% of gross rent into a capital improvement fund to cover future repairs and expenses. That should be enough to cover surprises but many investors say 15% is more realistic.

Make sure you account for all expenses when analyzing your cash flow (insurance, any utilities you pay, property management, vacancy (10%), mortgage, taxes, etc.)

[Matt Devincenzo]

Here's my general breakdown...it basically follows the "50% rule of thumb":

Taxes-Actual from the assessor usually about 6% of the rent amount/mo

Ins-Actual from my insurer usually about 7% of the rent amount/mo

Vacancy- 1 month out of 12

Turnover- $500/year for wear & tear items not covered by the deposit

Maintenance- 10%

Management- 12%, 1 month lease up plus 10%/mo standard for area

Capex-5% for long term items like roof, A/C ect

That comes out to 55%. So far some do worse than that some do better but it's a good general guide when I'm evaluating a deal. Then subtract financing expense each month and that leaves me with my "profit".

I personally don't touch my rental income, it is a separate bank account that funds itself to acquire more property as my goal right now is to build a portfolio. Later in life I'll switch to using that income I'm sure, but for now I'm trying to become "employment proof" as best as I can.

[Joshua Fair]

@Eddie Werner @Shawn Thom @David J.

Thank you for the responses. My plan to get started in REI is to rent my house out, I bought it when the market was at its low and now the market is gradually coming back up. So how would your balance sheet look for my first property.

Renters Expense:

Deposit: $3,000

Rent: $1,400

My Expenses:

Mortgage payment w/ Insurance and Taxes: $800.00

Renter pays for all utilities.

[Kimberly T.]

This may sound overly simple, but we allocate $50/unit/month. Granted, we only have multifamily rentals (no SFRs), so one roof covers 3-4 units, one main line sewer serves 3-4 units, etc.

I have never really understood the premise of allocating maintenance expenses as a percentage of the rent. We own a triplex here in OC, and 2 fourplexes in Scottsdale AZ. We have 2 bedroom units in each of those properties, but the ones in OC rent for more than twice what the ones in AZ rent for. However, repairs don't cost more than twice as much in OC as they do in AZ. In fact, repair costs are fairly comparable in OC and AZ. So why would I save over twice the amount from our OC rents as I would from our AZ rents? Just makes no sense.

Since yours is a SFR, I'd save more per month. As David suggested above, though, you might want to save it all up until you have a good cushion for a major expense, then drop down to maybe $100/month or whatever you are comfortable with.

[Michael Moikeha]

@Kimberly T.

The percentage is just a rule of thumb. Generally in MF its 40%-50%.

When you go to sell the place, if you are saying that you only have 20% expenses, then your potential buyers are going to be wondering about deferred maintenance.