CapEx and Property Management - higher than expected

[Nick S.]

As I continue to analyze deals while I look to buy my first rental property, I've recently come to the realization that my initial cost estimates were probably on the low side. Just today, I think I've convinced myself that my previous assumptions for CapEx and Property Management were previously too low (I was assuming ~7% of rents for CapEx and ~10% of rents for property management).

As far as CapEx goes, I was previously just using 7% of rents because it seemed like a "good enough" number. But after some more research and reading, it seems like 10% or more is more realistic in the longterm. Brandon Turner put together a nice table with data to back this up in this article: https://www.biggerpockets.com/renewsblog/2015/10/1...

As far as property management goes, I was assuming 10% of rents because that's what I've always heard as a rule of thumb. However, in Houston, I didn't realize that most management companies will ALSO charge 1 months rent to get the unit leased. 1 month of rent in a year is 8.3%, so that comes out to be 18.3% of gross rents go toward property management every month? Sheesh!

Once I start assuming these costs, coupled with high property tax in Houston, it's looking like I'm going to have to search for an even better deal in an area that has very strong rents in order to get a decent return on investment. Something like purchase price + rehab = $110k and rent for $1500/month to get $100/month of positive cash flow with a 20% down payment. Not too many of those deals out there right now, it seems.

I'd appreciate some feedback on these numbers to see if I'm on the right track -- do my numbers sound about right?

[Vijaianand Thirunageswaram]

@Nick S. I would like to share my 2 cents on this topic. Being a Investor, Realtor and PM, I get asked this question a lot from my investor clients. Your capEx depends on the condition of the property. It is subjective. If you are buying a property and making full rehab on the property, something to go wrong within a year is going to be 5% out of 100. So I wouldn't by default put 10% capEx on every property. That's my take on it. I do myself put 10% on my analysis sheet for most properties if I don't make the rehab on those properties.

Coming to PM cost, it depends, 10% is too high and there are many companies who do flat fees if you work with them and create relationship. We don't charge 10% as well, we charge flat fee very less compare to big fish out there. Anyway, taking that one month rent lease up fee, 8.3% is wrong way to do it. it's not going to be %18.3 every month. You gotta divide 8.3%/12 months, making it 0.07%, so your PM can be 10.7% per month. That would be better calculation than 18.3% every month. On the other hand, you don't know how long the tenant going to stay and may be 1-2 years or even less. It depends. so you cannot really fix the percentage. Being conservative is good but at same time shouldn't bogged with numbers and lose deals. 

Hope its clear as mud :-)