Estimating expenses post-purchase

[Sushil Iyer]

When analyzing a deal, the expenses data available (opex, vacancy, PM, capex, etc.) is at the time of purchase. However, this data is bound to change post purchase. What are some tips to estimate what these expenses will be 6M, 1yr, 3yrs post purchase? Alternatively, are there some ballpark estimates for each expense item (e.g., 8% for vacancy, 3% for capex, etc.) that can be factored in as realistic or worst case scenarios when analyzing the deal? Thank you.

[Tim Delaney]

The best way to estimate expenses is experience and knowledge of your specific asset type and market.

For vacancy, that will depend on your market and the quality/desirability of your type of unit. If you have a 6 bedroom in an area that does not have a university (students looking for shared space) or is in a family friendly place it may sit vacant longer between tenants.

For Capex, try not to use a generic number - look at the roof, furnace, hot water tank, kitchen - when will each need to be done and what will it cost? Then divide that cost by the amount of time between now and then and that's how much you should be putting aside for Capex.

For general maintenance, the age and condition of the building will play into that. A new build should require much lower maintenance expense vs a 100 year old home.

Hope this helps.

[Sushil Iyer]

Thank you, Tim. Indeed, very helpful.

Quote from @Tim Delaney:

The best way to estimate expenses is experience and knowledge of your specific asset type and market.

For vacancy, that will depend on your market and the quality/desirability of your type of unit. If you have a 6 bedroom in an area that does not have a university (students looking for shared space) or is in a family friendly place it may sit vacant longer between tenants.

For Capex, try not to use a generic number - look at the roof, furnace, hot water tank, kitchen - when will each need to be done and what will it cost? Then divide that cost by the amount of time between now and then and that's how much you should be putting aside for Capex.

For general maintenance, the age and condition of the building will play into that. A new build should require much lower maintenance expense vs a 100 year old home.

Hope this helps.

[Addy Chupa]

When analyzing deals, I usually include a 5% vacancy factor and 5% repair factor based on annual rent. I also assume a 3-4% yearly rent increase, which naturally increases the vacancy and repair amounts over time. For expenses like utilities, property tax, and insurance, I estimate a 3% yearly increase.

However, keep in mind that if you do renovations in the first year, it’s likely you won’t need the full 5% repair allocation for the first or even second year. If it’s not used, I treat it as reserve funds. 

[Sushil Iyer]

Thank you so much. This is very helpful. 

Quote from @Addy Chupa:

When analyzing deals, I usually include a 5% vacancy factor and 5% repair factor based on annual rent. I also assume a 3-4% yearly rent increase, which naturally increases the vacancy and repair amounts over time. For expenses like utilities, property tax, and insurance, I estimate a 3% yearly increase.

However, keep in mind that if you do renovations in the first year, it’s likely you won’t need the full 5% repair allocation for the first or even second year. If it’s not used, I treat it as reserve funds.