Question On Expenses
I'm just starting to look at purchasing my first rental property and I'd like some help with my expenses when I evaluate different properties. I have no previous experience in this so I am just using some rough estimates and would like to know if they are reasonable or if I should adjust them up or down.
My estimates are in percentages of rent:
Vacancy 10%
Operating Expenses 10%
Property Managment 10%
Major Repair allowance 5%
About the area I'm looking in:
I am looking at the college town where my wife went to school. For the college town, the majority of leases are for a full year and there is a good history in the town where the tenets find the next tenet to move in (through soroities/fraternites mainly) and students tend to pay rent during the summer even if they are not there so they can keep their belongings at school as the major population centers where the students come from are 3-4 hours away. So I believe 10% vacancy would be a safe assumption.
The properties I am looking at our houses and the tenets would be responsible for the heat, electric, water etc.
I added taxes and insurance into my mortgage payment when I did my analysis so they are in my analysis. Does anyone know if .75% of purchase price is a decent estimate for insurance? I'd rather be conservative and actually have a few extra $$'s in the cash flow then a few less. I would find out the exact price eventually but want an estimate to do some pre-analysis to focus the properties I'd be looking at.
The operating expenses would be like minor repairs/painting.
I haven't yet decided if I would use a property manager or not. If I didn't, this would be part of operating expenses and then cover mowing & snow removal on my own.
Have I accounted for every expense? Are they good estimates? I just chose 10% as it is a nice round number, anyone have more experience here?
All information is appreciated
Bob
If you are just looking for "rules of thumb", I would use a 40% operating expense factor (includes property management).
Reduce your expected rent by your vacancy factor then subtract your operating expense factor. The amount you have left over should be at least 125% of your debt service.
If the property you are considering passes this rough screening, then refine the numbers and put this property in your "seriously consider" category.