Expense To Income Percentage
What is the average percentage of income that should be reserved expenses not including loan payments. This is for doing investment analysis of potential rental properties.
I'm looking at 1-4 unit residential homes and apartment buildings.
As a rule of thumb, I would use a 50% expense ratio in the absence of any information. Refine your expense ratio as you get accurate estimates for your operating expenses.
ouch 50% is alot the book I was reading said 30% of rental income for expenses. 50% doesn't leave much left over for the loan payments. Would you increase your down payment to aviod a negative cash flow?
Start with whatever number makes sense to you. If the book you are reading includes all the expenses you are likely to pay for the type of property you own in the market in which you will be investing, then follow the book's suggestion.
For my properties, in my market, here is my breakdown against gross scheduled income.12.35% Condo/Homeowners association fees
01.20% Leasing Fees
03.43% Maintenance and Repairs
08.65% Management Fees
00.52% Rent refunded to tenant
00.08% Telephone/Postage
00.15% Business Gifts
01.34% Hazard Insurance
12.11% Property TaxesThis all rounds off to 40% of my gross scheduled income. Add in a vacancy allowance, a replacement reserve, and advertising costs, I could push this number closer to 50%. Even higher if I were to pay for professional services such as bookkeeping and tax preparation. If you do your own management, you could lower your estimate.
With large apartment buildings you don't have a homeowners association fee but you do have higher maintenance, cleaning, and repair overhead -- including things like yard service, snow removal, trash removal, dumpster rental, supplies, common utilities (water and cable TV?), and parking lot lighting and maintenance.
As I said, start with whatever number you wish, but refine your expense ratio as you gather accurate details on your projected costs.
I usually figure 15% for expenses. but this doesn't include management fees, taxes, and insurance. Unless I've had to do major replacements like roof or windows, I've never had expenses even come close to 15%. But this way, if the math works out and I like the property, I figure it'll bring me an even higher cash flow than what I've calculated. Plan for a worse scenario than what it really is. If under these circumstances the numbers are still to your liking, you know you've got a good investment.
[addsig]
Looking at my own expenses, 30% looks about right. However, this is going to vary depending on the part of the country you live in and the type of property you own.