Reality check - evaluating properties, 25% set asides?

[Jim Truman]

Hello BP,

I am looking for my second property (SFH buy and hold) and would like a reality check on my set asides when evaluating deals. I'm not asking how much cash I should have on hand in reserves - we have plenty of cash - but what my numbers should be when evaluating a rental vs another investment?

My requirement is Cash on Cash of 8%. If I can't hit this I'd rather not deal with the hassle of a rental property and will leave the money in the market. I read some posters on here who say as long as they have cash on hand to cover repairs than they don't worry about calculating set asides in the math. To me this is misleading and makes a rental investment look better than it actually is. 

I definitely do not ever want to be under water on an investment so I use:

5% vacancy

10% Maintenance

10% CapEX

10% PM.

I understand this is conservative but is this still reasonable? I ask because its seemingly impossible to find properties that CoC around 8% with 25% set asides. I'm not interested in rehabing property - updating is fine - but not an entire rehab.

I like Roofstock's website for evaluating deals and can filter for attractive cap rates and gross yield but went I get into their numbers I see they never use 10% maintenance and 10% capex. The attractive deals become unattractive as soon as I change the numbers. 

I want to stay conservative because real estate isn't worth it to me if it's not a better option than my current investments. But I also want to ensure I'm not using unrealistic criteria. I also understand mortgage pay down and appreciation are extra, significant, bonuses but I really don't want to bank on appreciation. Especially in my budget, these properties won't appreciate all that much. 

Stick to my guns and keep using my 25%?

Thanks