Factoring vacancy, cleaning, and maintenance into expense ratios

When you're looking to build a rental property, you'll want to estimate what expenses are going to limit your cash flow. If your expenses exceed income, you'll likely want to walk away from the project or work things out another way. In this clip, our hosts discuss how to get a good idea of what your vacancy rate will be, as well as how to account for cleaning and maintenance fees.

Watch the full episode here: https://youtu.be/mTuftETWOUI

Steve Olson: So insurance, those guys are squirrels and you've got to manage that.

What other expenses should we be paying?

Chase Leavitt: Cleaning and maintenance.

Pretty easy for us or FIG (Fourplex Investment Group). Cause when we do our new construction build, it's very low. It's minimal, right?

There's the one-year builder warranty. And then after that, there's not a, not a ton of cleaning or maintenance. So what do we put in there?

Steve Olson: 1%. Yeah. Something like, well, because the HOA has taken all the exterior means.

Chase Leavitt: Yeah. So it's just the interior. So there's some formula and maybe you guys know that as the property gets older, that percentage is going to go up. So how do you factor that in or how do you calculate that?

Steve Olson: Well, in our proforma software, there's a way you can do an assumption for the expense annual expense increase.

There you go. Right? Wow. And so two and a half percent or something, we run it at three and we run our income inflation rate two and a half to help have a gap there because the property is just going to get older over time and it's going to pro-rata per dollar is going to cost you more. Right. Um, so another big one is a vacancy, right?

That's an expense that we have to deal with. What are your thoughts on, on vacancy? How do you determine?

Chase Leavitt: Talk with property management or different managers or call in different locations, different apartment buildings to see how full they are. If they're being leased up, we can look online and get data and read.

Google is a great source and, and see what the vacancy rate is for that area.

Steve Olson: CoStar will tell you per apartment complex, what their vacancy rate is, um, sites like Rentaller or rental meter pulling up Zillow. If you see a whole bunch of rentals, That should probably make you feel, feel nervous about your vacancy rate.

On the other hand, I see some news reports. I think I put it in our slack channel, local news in Phoenix interviewing tenants that are crying, saying every time I apply, it's already gone. That's bad for them. But if you're the owner, if you're trying to figure out rent projections, that would tell you, you could probably be a little more aggressive.

Sherida Zenger: I think we're seeing that in all the states we're in right now, too. Not much as sitting around for very long,

Steve Olson: If it's sitting around and I know a few of that are, but those are exceptions and different scenarios.

Chase Leavitt: So you can really gather a lot of information just by calling around on the comps as we talked about, we're talking about the vacancy, right? You can call and see, okay. What's vacant. You look at the similar floor plan, whether it's a three-bedroom, two-bath, two-bedroom, two-bath, whatever. And if that complex is fully leased up and has a waiting list, what does that tell you? So you go off of what the vacancy is in that city or that area.

And then if you have comps that are just completely full, that's a pretty good sign. We'll still be conservative with it, but that's a really good sign.

Sherida Zenger: And while you're asking them about vacancy, just go ahead and ask them about what their rents are.

Chase Leavitt: Exactly. Which can lead us into something.

Steve Olson: Right. You're pulling up Google. You're looking up these vacancy rates, trying to get an idea of how much competition is there. Right? You can listen to city council meetings about new proposed projects, because what if your vacancy rate is 2%, but there are a thousand doors slated for a local sub-market that maybe has the ability to absorb 600.

Chase Leavitt: That's a good point. I don't think a lot of investors take it to that next step. That's huge.

Steve Olson: Those city councils coming huge. Talk to your developer that you're working with. What else have you heard about what else is going in here? And it's just not that something is going in, but what kind of product is going in, because if it's different than yours, that might be okay.

The point is, is you don't want to slam the market with too much of one thing at one time, which we have been guilty of a number of times

Sherida Zenger: when we did that in American fork. Remember we had Eastern park. And I don't know if we were aware or weren't aware of what else was going on around, but we had some delays in that project, I think really set us back and then it ended up all of a sudden we have all these neighbors and rents there for rent too.

And the rents had to go down a little bit below what proforma. So it's taken a while. They're back up to get, you know, market rent right now. And that project is great, but it did,

Steve Olson: it took some time to, you know, I tell people, you know, absorbing is like, if you eat a, a 50-ounce steak, right. Could be a good steak, but it's gonna take some time.

Right. I think what Chase Leavitt said, if you want to go really deep, I think the most valuable confirmation you have of any of this high-level research is you go into that leasing office. And I've been guilty of saying, you know, going in and saying, I'm, you know, I'm Billy Bob and I move in some employees into the area.

Cause what do I, what am I going to say? Like, Hey, I'm going to build an apartment complex next to you. I'm your competition. Yes. I have been that direct before. They don't care. Sometimes they don't care.

In fact, I think we even hired, somebody wants because of a conversation like that in Idaho, but those conversations are really, really.

Where they say, oh yeah, we've we don't have any of our three bedrooms available until next November. I've got six, two bedrooms right now. And there's a special, what, what does that tell you about the market?