Am I overestimating expenses?

Question

Hello Bigger Pockets! I'm hoping to invest in buy and hold properties in the Raleigh, NC area (specifically Cary). I've been spending a lot of time lately analyzing potential deals, and I'm wondering if I'm being too conservative on my estimates. Here are some numbers I'm using with an example:

Take a 3 bedroom, 2 bathroom property near downtown Cary, built in 1955. The appraised tax value is about $145,000, and it seems like houses in the area retail for about $150,000-$155,000. The house will likely rent for $1,100/month.

Here's the expense breakdown:

• $115/month for taxes
• Estimated $110/month for insurance (10% of rent)
• Estimated $91/month for vacancy (1 month out of the year vacancy)
• Estimated $88/month for repairs (8%)
• Estimated $110/month for CapEx (10%)
• Estimated $110/month for property management (10%)

That's a total of about $625/month for expenses. Accounting for a $600/month mortgage payment I'm losing $125/month. Even if I just use the 50% rule I'm still losing about $50/month.

I know the answer is that I need to find a deal or negotiate down off of the retail price, but the question is how much? People in the Raleigh area, are you finding that rental expenses are close to 50%? Over? Under?

Daria B. · Answer

Are you arbitrarily using 10% for your CapEx or are you looking at the life of all the systems and gaging the % on the remaining life? If you have new HVAC, Roof, W/H (not much of a cost) then your CapEx will not be as greater a % because those systems are new(er). I generally lump the % of R&M to a greater extent and adjust my CapEx based on the replacement of the major systems.

Insurance is one that you can get a better $ on by calling an insurance agent/broker and asking them for a quote. This I found has been extremely helpful in my analysis to use more real numbers than just estimating something that I would be unsure of and just throwing out a %. I've spoken to my insurance agent/broker so many times that I rarely call them unless it's something new to the house that I've not encountered before.

You are correct in that the retail price does not make for a good deal. How much you negotiate down from anything I would think would be based on what you want to get.

This is a spreadsheet I found in the file share by Sam Tato. I started using it to get a better gage on my CapEx numbers.

https://www.biggerpockets.com/files/user/samtato/f...

David Roberts · Answer

Dont forget to account for city inspections and city fees.  A couple cities here I know of charge an an annual fee for maintaining rental status, and maybe every 2-5 years a rental inspection.   Work that in monthly cost off your cash flow if you havent.  Fees are not profit.

Its tough.   Everybody has their hand out lol.

Property management is almost never 10%.  Its 10% to manage, but add in their tenant finder fee of say half month rent and you are at an effectively at 12% or more.  Some have setup fees also.  Just putting it out there.

It is hard to be honest, and easy to look past the details. Feel good about yourself for that!

Also like others have said, newly rehabbed houses start with much lower repairs, maintenance and cap ex.  If you start with all new and your selling point is 5-10 years, then you will have to save very little reserves for that stuff.  If you hold forever,  then obviously its not going to be linear,  and as time goes by risk goes up to replace and repair stuff.

Ian Walsh · Answer

I agree.  Good job being honest with the numbers.  Most people mess that up.

Brandi Carballo · Answer

Insurance varies from area to area, get a quote from an agent. I only pay about $475/yr for insurance on my rentals in Oregon.

Other than that I think your numbers are good. When buying my first rental property I failed to account for maintenance and CapEx. Luckily, it was a great deal on a great property and I still cashflow, just not as much as I thought I would.

It is getting harder to find good rental properties out here, too. There are areas where it just doesn't pencil out.

Good luck!

Dawn Brenengen · Answer

I would put insurance at closer to $800/year.  You should only have a week of vacancy/year on average.  This would assume an average of a two year tenancy with two weeks of vacancy to get the next tenant in.  And I think that's pretty conservative.  I also agree about paying attention to the age of the roof, water heater, HVAC and appliances.  If they are newer, I would use a smaller CapEx number.  If not, you are good where you are.

All that being said, the deal is marginal.  It is Cary, though...so there is that.

Gregory Pugh · Answer

@Alex Corvin As a general rule no I would not as my business plan involves buying and holding to increase my passive cash flow. Others may purchase properties that will break even or lose money if they think the area is in line for a considerable jump in property values or rent in the future, however I am not one to speculate and do not let that influence my numbers.

I initially screen potential investment properties and save time by applying the various rules of thumb: 50% rule for expenses, 1% rule for rents, etc. If the property does not pass one of those rules it's a good indicator that it will not cash flow as well as others that pass all of them. From that pool of properties I then get into the details of estimating individual expenses and income potential to find one that works for me.

Joe D'Occhio · Answer

Alex,

I sent you a PM

Alex Corvin · Answer

@Gregory Pugh Does that mean you won't consider an area if buying at 70% of retail prices doesn't allow for a profit when estimating expenses at 50-60% of monthly rent?

Gregory Pugh · Answer

As far as working the numbers go I don't believe you'll ever go wrong erring on the conservative side as far as monthly expenses go. If I'm analyzing a property on the first run through I will plug in the properties' ~70% ARV for purchase price, low end rent, high end costs for repair, capex etc. and throw in 10% for future management costs. If the numbers come out solid and cash flowing then I know any additional positives I encounter will only increase my cash flow (able to rent for higher, eliminating management fee through self management, etc.).

Am I overestimating expenses?

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