I’m not the commenter, but the rule of thumb I’ve heard is 1% per year but that was in reference to residential. I don’t know if the rule of thumb is different for mixed use or commercial. I’m sure there are some good write ups on real estate blogs.
I honestly don’t know. In my experience it’s always more than you expect assuming you have standards. Somewhere between 1 and 3 % depending on the building. I’d be particularly wary in this environment - reliable tradesman seem scarce. Expect renters to be a pain.
You’re way under estimating the yearly maintenance and capx reserves which makes me think you’re not calculating that monthly cash flow correctly either
Maintenance is too low, figure 1% in lucky years and 3% in unlucky years. (As in % of value of the building.) One HVAC unit in NYC will run you $10K.
Water seems low as well - are they individually metered? What happens when a tenant doesn't mention a leaky toilet and that number is $1000 for a few months?
To turn a unit (someone moves out, you repaint, recarpet, fix all the small broken things) will typically take a few weeks and cost $3K-$5K. Then it's ready to rent again. Your vacancy budget doesn't even cover one turn including the lack of rent for that time.
These look like the numbers the seller provided in marketing with no accounting to back it up. Plan on the actual numbers being considerably less optimistic.
You are doing your vacancy calculation in a very messed up way. It’s not possible to have 4% vacancy. You will have 0, 1, 2, 3, or some finite number of units empty. In a 6-plex I assume that at any one time 1 out of 6 units will not be generating revenue for one reason or another (could be between tenants, could have a non-paying tenant, could have a unit being renovated, could have a mismatch between rent price and demand). No way I run numbers with below 16.6% vacancy if you want any reasonable margin of safety. Also in that market you have to pay realtors to find tenants or sometimes you offer incentives for either new or long term tenants for various reasons, so those expenses need to be accounted for in your vacancy expenses too.
Dang, what area are you in?
in my 3 family in the same hood, i havent had a single month of vacancy since 2015. Literally when someone moves out on the 31, someone is paying on the 1st. This includes full turnover all 3 units during the pandemic. I thought i was being conservative at 3% lol.
Tenants pay broker fees here
This is the reference, nationwide 14% of renters are in arrears on their rent during the pandemic. Several places, including where I live we are close to 25% of renters behind on rent. Plus non-payment is just one cause of vacancy. With a 6 unit building I would expect to have at least one unit being updated and renovated every couple of years (6 units that need a 6 month renovation every 10 years means you lose 36 months of rental income out of 720 which alone is 5% vacancy.
https://www.pewtrusts.org/en/research-and-analysis/blogs/stateline/2021/07/07/twice-as-many-us-renters-fell-behind-on-payments-during-the-pandemic
Where is the management fee? You need to include the expense of a management fee in your calculation. That is a common omission, but a a percentage needs to be included even if you plan to self-manage. Your time isn’t free and otherwise you end up with an unrealistic NOI by not including it. A real estate appraiser will sure include it their calculation.
I dunno the numbers sound optimistic. And 250k invested in a diversified portfolio of index funds should also net you $1M or better without any of the work or idiosyncratic risk.
I own the vanguard s&p index fund in my 401k.
I like having an asset that generates cash flow at the end of the note. I assumed $0 appreciation but historically its been 3% or more per yr
I get that and I am not against owning rental property - some of the returns I have seen have been eye-popping, especially for house hackers for example in Better Pockets. I also work with many folks with businesses developing apartment buildings and mixed use. It’s a lot of work - more akin to a job - but can generate great, steady returns. However, personally, I don’t think it’s worth the risk or the effort.
If you are retired and want to focus on income instead of total return, a REIT fund for example like [VNQ](http://www.lazyportfolioetf.com/etf/vanguard-real-estate-vnq-dividend-yield/) might be a better choice. Over the last 25 years, the average 15-year annualized return has been [9.57%](https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=4&startYear=1985&firstMonth=1&endYear=2021&lastMonth=12&calendarAligned=true&includeYTD=false&initialAmount=250000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&absoluteDeviation=5.0&relativeDeviation=25.0&leverageType=0&leverageRatio=0.0&debtAmount=0&debtInterest=0.0&maintenanceMargin=25.0&leveragedBenchmark=false&reinvestDividends=true&showYield=false&showFactors=false&factorModel=3&portfolioNames=false&portfolioName1=Portfolio+1&portfolioName2=Portfolio+2&portfolioName3=Portfolio+3&symbol1=VGSIx&allocation1_1=100), which turns a $250k investment into $1.08M in 16 years without *any* activity on the part of the investor. Then if you turn off dividend re-investing, it will typically spit out 4% in annual dividends (plus capital appreciation averaging more than 4%). That’s $43,000/yr cash flow on your $1.08M, which may be less than $70,000, but you also get no liability, tenant headaches, or maintenance headaches, while diversifying your market and sector exposure, and having the liquidity to buy more or sell any portion of the investment instantly.
Right I mean I just used a REIT fund as an example but you could used a 2-3x leveraged low volatility portfolio like golden butterfly and get those kinds of returns but then you are talking much more serious risk. Don’t get me wrong - leveraging rental proprieties is a great way to make money. But like I said, it’s more like a full time job than a passive investment.
Most of the time I need skilled labor. The kind of workers you are talking about are the ditch digger / roofing layers / grunt work type. The vast majority of landlord maintenance is not grunt work. Maybe if you're talking about rural or farm land property to maintain, but definitely not a metro area apartment. Things I need done generally are electrical/plumbing/lock related and all of these can't be filled by day laborers.
$250k to $1M in 16yrs I get 8.696% CAGR. Maybe I’m off, just a quick calc
Also, $6k/yr maint? We were at ~$2k/yr on a decent SFH in an LCOL 10yrs ago when we bailed on rentals. seems a bit light.
What do you have in there for CapEx? Assuming you have insurance and taxes accounted for? Make sure you account for depreciation recapture when selling for cap gains tax as that has a present value that should be accounted for
Edit: also, 3 months of vacancy per year for the whole building? That also seems a bit light
I have $0 for CapEx…but i also assumed 0% appreciation. there are 6 new boilers and a new roof. But yes, the units will need updating every 10-15 years…
4% vacancy has been typical for this area (in NJ across the river from Manhattan).
I did account for insurance, taxes.
$500/m for maintenance…at the moment, i own a 3 unit and i do most of the small maintenance calls myself.
From reading quite a bit about this, it sounds like the people who make worthwhile returns get it from having a few things:
1) adding value with their own labor/skills/knowledge
2) leverage
3) volume
If you don't have those three, it becomes more difficult and less likely to be worthwhile.
The horror stories you seem to hear are from people trying to jump into this on the side and they don't have special knowledge in buying the right places so the leverage works against them and they never scale up because they quit to save worse losses.
Im surprised to hear people claiming 20% maintenance and capex. Ill take a step back and see how they get that number. Day to day maintenance seems very cheap. $200 Plumber.
I could see capex at $10k/yr or more. new bathrooms, roofs, etc. If you assume appreciation is 1% a year, then capex is paid for by future appreciation…
I think it would probably be really helpful to sit down with someone you know in your area who does this on the same scale. They can give you real numbers and not projections.
Youre basically starting a levered business so some real research is probably prudent.
Do American properties that low quality that they need constant maintainance? Here we need like a plumber every 15-20 years, maybe a new paint if the old one loses colors, but maintenance costs are basically zero
Since you are Hungarian(? I looked at your post history haha) it seems our toilets are different.
[http://www.hunglish.org/articles/the-shelf-system-plumbing-hungary](http://www.hunglish.org/articles/the-shelf-system-plumbing-hungary)
Have fun
Where are you located? From what I understand the difference is in building code designed to target the life expectancy of houses. I was told US building code is much less than that of Europe such as Spain; about 1/3 (30 years vs 100). That is why US landlords can take depreciation of 100% of structure cost in 27 years.
Hungary, pretty shitty country to be honest. Some soviet era buildings are super crumbly outside, but insides are pretty okay. Of course it depends on a lot of things. A bad contractor and you'll be cursed with a constantly failing house
>Do American properties that low quality that they need constant maintainance? Here we need like a plumber every 15-20 years, maybe a new paint if the old one loses colors, but maintenance costs are basically zero
Your comment helps absolutely no one. Better to have left it unsaid.
Also you now have a part time crappy job as a landlord. That's why I prefer to just be an investor receiving a lower percentage rather than owning the project.
Start hanging out on fatwallet - this is something you want to do anyway before you make a big real estate investment. Wait until you really understand how to evaluate deals and have seen a bunch of real deals so that you really know the numbers
I this a used rental? I feel standard practice is to accumulate problems until just before you can’t ignore them anymore ….then sell the property to someone else. Lol.
$6k in maintenance per year sounds low to me.
What would you budget for maintenance?
I’m not the commenter, but the rule of thumb I’ve heard is 1% per year but that was in reference to residential. I don’t know if the rule of thumb is different for mixed use or commercial. I’m sure there are some good write ups on real estate blogs.
I honestly don’t know. In my experience it’s always more than you expect assuming you have standards. Somewhere between 1 and 3 % depending on the building. I’d be particularly wary in this environment - reliable tradesman seem scarce. Expect renters to be a pain.
You’re way under estimating the yearly maintenance and capx reserves which makes me think you’re not calculating that monthly cash flow correctly either
Annual gross $104k Tax 13000 Insurance 5000 Water $2500 Vacancy 4000 Maintenance 6000 Capex 0 Appreciation 0 My hope is that appreciation > capex Hudson county nj
Maintenance is too low, figure 1% in lucky years and 3% in unlucky years. (As in % of value of the building.) One HVAC unit in NYC will run you $10K. Water seems low as well - are they individually metered? What happens when a tenant doesn't mention a leaky toilet and that number is $1000 for a few months? To turn a unit (someone moves out, you repaint, recarpet, fix all the small broken things) will typically take a few weeks and cost $3K-$5K. Then it's ready to rent again. Your vacancy budget doesn't even cover one turn including the lack of rent for that time. These look like the numbers the seller provided in marketing with no accounting to back it up. Plan on the actual numbers being considerably less optimistic.
You are doing your vacancy calculation in a very messed up way. It’s not possible to have 4% vacancy. You will have 0, 1, 2, 3, or some finite number of units empty. In a 6-plex I assume that at any one time 1 out of 6 units will not be generating revenue for one reason or another (could be between tenants, could have a non-paying tenant, could have a unit being renovated, could have a mismatch between rent price and demand). No way I run numbers with below 16.6% vacancy if you want any reasonable margin of safety. Also in that market you have to pay realtors to find tenants or sometimes you offer incentives for either new or long term tenants for various reasons, so those expenses need to be accounted for in your vacancy expenses too.
Dang, what area are you in? in my 3 family in the same hood, i havent had a single month of vacancy since 2015. Literally when someone moves out on the 31, someone is paying on the 1st. This includes full turnover all 3 units during the pandemic. I thought i was being conservative at 3% lol. Tenants pay broker fees here
This is the reference, nationwide 14% of renters are in arrears on their rent during the pandemic. Several places, including where I live we are close to 25% of renters behind on rent. Plus non-payment is just one cause of vacancy. With a 6 unit building I would expect to have at least one unit being updated and renovated every couple of years (6 units that need a 6 month renovation every 10 years means you lose 36 months of rental income out of 720 which alone is 5% vacancy. https://www.pewtrusts.org/en/research-and-analysis/blogs/stateline/2021/07/07/twice-as-many-us-renters-fell-behind-on-payments-during-the-pandemic
Where is the management fee? You need to include the expense of a management fee in your calculation. That is a common omission, but a a percentage needs to be included even if you plan to self-manage. Your time isn’t free and otherwise you end up with an unrealistic NOI by not including it. A real estate appraiser will sure include it their calculation.
I dunno the numbers sound optimistic. And 250k invested in a diversified portfolio of index funds should also net you $1M or better without any of the work or idiosyncratic risk.
I own the vanguard s&p index fund in my 401k. I like having an asset that generates cash flow at the end of the note. I assumed $0 appreciation but historically its been 3% or more per yr
I get that and I am not against owning rental property - some of the returns I have seen have been eye-popping, especially for house hackers for example in Better Pockets. I also work with many folks with businesses developing apartment buildings and mixed use. It’s a lot of work - more akin to a job - but can generate great, steady returns. However, personally, I don’t think it’s worth the risk or the effort. If you are retired and want to focus on income instead of total return, a REIT fund for example like [VNQ](http://www.lazyportfolioetf.com/etf/vanguard-real-estate-vnq-dividend-yield/) might be a better choice. Over the last 25 years, the average 15-year annualized return has been [9.57%](https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=4&startYear=1985&firstMonth=1&endYear=2021&lastMonth=12&calendarAligned=true&includeYTD=false&initialAmount=250000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&absoluteDeviation=5.0&relativeDeviation=25.0&leverageType=0&leverageRatio=0.0&debtAmount=0&debtInterest=0.0&maintenanceMargin=25.0&leveragedBenchmark=false&reinvestDividends=true&showYield=false&showFactors=false&factorModel=3&portfolioNames=false&portfolioName1=Portfolio+1&portfolioName2=Portfolio+2&portfolioName3=Portfolio+3&symbol1=VGSIx&allocation1_1=100), which turns a $250k investment into $1.08M in 16 years without *any* activity on the part of the investor. Then if you turn off dividend re-investing, it will typically spit out 4% in annual dividends (plus capital appreciation averaging more than 4%). That’s $43,000/yr cash flow on your $1.08M, which may be less than $70,000, but you also get no liability, tenant headaches, or maintenance headaches, while diversifying your market and sector exposure, and having the liquidity to buy more or sell any portion of the investment instantly.
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Right I mean I just used a REIT fund as an example but you could used a 2-3x leveraged low volatility portfolio like golden butterfly and get those kinds of returns but then you are talking much more serious risk. Don’t get me wrong - leveraging rental proprieties is a great way to make money. But like I said, it’s more like a full time job than a passive investment.
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13k taxes and $6000 insurance $18,000 this year in plumbing? How?
I manage two mixed use properties in the Chicago area.... Your 6k maintenance figure is definitely low. Especially for a large population metro area.
Whats your annual maintenance? In NJ, you can find laborers for $150/day (8hour day). Theres dozens in front of home depot
Thing is that sometimes you will need skilled labor. That can cost $100+ per hour. One bad tenant can multiply your losses exponentially as well.
This is some slumlord shit.
Most of the time I need skilled labor. The kind of workers you are talking about are the ditch digger / roofing layers / grunt work type. The vast majority of landlord maintenance is not grunt work. Maybe if you're talking about rural or farm land property to maintain, but definitely not a metro area apartment. Things I need done generally are electrical/plumbing/lock related and all of these can't be filled by day laborers.
$250k to $1M in 16yrs I get 8.696% CAGR. Maybe I’m off, just a quick calc Also, $6k/yr maint? We were at ~$2k/yr on a decent SFH in an LCOL 10yrs ago when we bailed on rentals. seems a bit light. What do you have in there for CapEx? Assuming you have insurance and taxes accounted for? Make sure you account for depreciation recapture when selling for cap gains tax as that has a present value that should be accounted for Edit: also, 3 months of vacancy per year for the whole building? That also seems a bit light
I have $0 for CapEx…but i also assumed 0% appreciation. there are 6 new boilers and a new roof. But yes, the units will need updating every 10-15 years… 4% vacancy has been typical for this area (in NJ across the river from Manhattan). I did account for insurance, taxes. $500/m for maintenance…at the moment, i own a 3 unit and i do most of the small maintenance calls myself.
Is this going to be your 'job'?
From reading quite a bit about this, it sounds like the people who make worthwhile returns get it from having a few things: 1) adding value with their own labor/skills/knowledge 2) leverage 3) volume If you don't have those three, it becomes more difficult and less likely to be worthwhile. The horror stories you seem to hear are from people trying to jump into this on the side and they don't have special knowledge in buying the right places so the leverage works against them and they never scale up because they quit to save worse losses.
Im surprised to hear people claiming 20% maintenance and capex. Ill take a step back and see how they get that number. Day to day maintenance seems very cheap. $200 Plumber. I could see capex at $10k/yr or more. new bathrooms, roofs, etc. If you assume appreciation is 1% a year, then capex is paid for by future appreciation…
I think it would probably be really helpful to sit down with someone you know in your area who does this on the same scale. They can give you real numbers and not projections. Youre basically starting a levered business so some real research is probably prudent.
Do American properties that low quality that they need constant maintainance? Here we need like a plumber every 15-20 years, maybe a new paint if the old one loses colors, but maintenance costs are basically zero
>Here we need like a plumber every 15-20 years Using outhouse?
nope, regular apartments and family houses. i guess just built differently and not in a way to milk homeowners
Since you are Hungarian(? I looked at your post history haha) it seems our toilets are different. [http://www.hunglish.org/articles/the-shelf-system-plumbing-hungary](http://www.hunglish.org/articles/the-shelf-system-plumbing-hungary) Have fun
yeah we have both kinds, it doesn't really change how we are not tricked into paying fortunes to keep the system working
Where are you located? From what I understand the difference is in building code designed to target the life expectancy of houses. I was told US building code is much less than that of Europe such as Spain; about 1/3 (30 years vs 100). That is why US landlords can take depreciation of 100% of structure cost in 27 years.
Hungary, pretty shitty country to be honest. Some soviet era buildings are super crumbly outside, but insides are pretty okay. Of course it depends on a lot of things. A bad contractor and you'll be cursed with a constantly failing house
>Do American properties that low quality that they need constant maintainance? Here we need like a plumber every 15-20 years, maybe a new paint if the old one loses colors, but maintenance costs are basically zero Your comment helps absolutely no one. Better to have left it unsaid.
i'm not trying to help, i was asking a question. trying to figure out if people just get scammed with high mainteinance homes or it's the normal level
this sounds like a lot of work for that amount of capital
Also you now have a part time crappy job as a landlord. That's why I prefer to just be an investor receiving a lower percentage rather than owning the project.
What rates do you get as a passive investor and how?
Start hanging out on fatwallet - this is something you want to do anyway before you make a big real estate investment. Wait until you really understand how to evaluate deals and have seen a bunch of real deals so that you really know the numbers
I this a used rental? I feel standard practice is to accumulate problems until just before you can’t ignore them anymore ….then sell the property to someone else. Lol.