Apartment Repairs and maintenance costs when underwriting

[Justin Pumpr]

Hey all,

What numbers do you use when projecting repairs and maintenance costs for apartment buildings?

My rules of thumb have been:

- $650/unit for 2000s or newer and $250 for cap ex

- $750/unit for 1980s-2000s and $275 for cap ex

- $850/unit for 1960s-1980s and $300 for cap ex

There is definitely some nuance here, but let's assume these properties have had "cosmetic updates" throughout, but have never been full guts. I'm looking at C/B class properties in C/B class neighborhoods in the midwest.

Do these numbers look about right? Are there other factors that should be taken into consideration? Is this model completely wrong?

Cheers!

[Kevin Sobilo]

@Justin Pumpr, a few comments:

1. It sounds like you are using building age and that makes no sense to me. A building built in 1960 might be better maintained and have less issues than one built in 2000. The age of the building doesn't necessarily mean you will have more or less issues.

2. A set price per unit doesn't make sense to me because the finishes in a C class unit in a modest market versus a B class unit in a more upscale market could be MILES apart and cost VERY different amounts to repair/replace.

3. I use the typical rules of thumb of 5/5/5. That is 5% of rent for Vacancy, 5% for maintenance/repair, and 5% for capital expenses. Those all go into a single account and are managed as a whole. A percentage makes sense also because a more expensive rental has more expensive things in it and likely is more expensive to repair/maintain.

4. Vacancy, maintenance, and cap ex are also managed across the whole portfolio so that things average out. If one property under-performs these estimates, others will over-perform and even things out somewhat. If one property consistently lags then I could adjust the percentages on that property.

5. In addition, some reserves should be available to handle any large unexpected issues that crop up before money accumulates to pay for it. You may encounter a large cap ex hit in the 1st year of ownership before your cap ex money has accumulated from rent and there should be leeway to handle that with some sort of reserve funds or maybe an open line of credit.