Analyzing Rental expenses Illinois, Chicago

[Vincent Parello]

Hey everyone,

I had a question about analyzing rentals, I see people add the expense of Maintenance, Property manager, and vacancy along with others. And I have learned that people use a percentage of the rent to figure out the following.

Maintenance 10%

Property manager 8-10 %

Vacancy 5 %

I know everyone may have a different way or a different percentage they use.

I wanted to get every ones opinion on this. I have been analyzing my deals with the PIMIA , utilities etc. and I do 23% for the long term expenses. Maintenance 10% PM 8% and Vacancy 5%. 

My question is, Is there any good reasons to justify lowering my percentages, For example. If I have a multi-unit can I lower the vacancy ? or if the home was built pre 2000 could I lower the Maintenance %?

[John Leavelle]

Howdy @Vincent Parello

Property Management percentage will largely be driven by the number of units managed.  The smaller the number of units the higher percentage it will more likely be.

Vacancy is Market driven.   Class of property and rent rates can also effect Vacancy rate.  A "C" class neighborhood with low rent may have higher turnover than a new area with top of market rents.

You will always have Maintenance cost. For initial analysis purposes I use 5 - 10% of NOI. How much depends on the age and condition of the property.

You did not include Capitol Expenses (CapEx). I generally use 10% of NOI for my initial analysis. Again, it can depend on the age and condition of the property. Once the property is under contract I will have the property inspected to determine the age and condition of all major components and appliances. Then I can a more accurate CapEx reserves requirement.

I would not recommend trying to lower my standards of analysis.  It is always wise to analyze properties with a conservative approach.  Like @Vincent Incopero