QUOTE (invst4profit @ Apr 10 2009, 10:26 AM) C2Ventures & RedlineBrett:
Both of the examples you have given do not apply to the 50% rule now simply because you have not owned them long enough. This formula is used to estimate long term hold expenses which is what REIN advocates. You have not yet experienced the major unexpected repairs, evictions, extended vacancies, renos etc. which inevitably crop up with every property. These expenses must be estimated and are what move your expenses up from 35% to 50% on average.
However always keep in mind this is an average estimate. Yes you could only experience 35% long term but on some units you could also see 60% or 70%.
Don`t forget to add expenses like utilities when vacant, legal, accountants, deductibles on insurance claims etc, even costs as simple as advertising, paint and rug shampooing between tenants.
It was asked why we have not seen bankruptcies with REIN members yet. Maybe because they do not talk about there mistakes or maybe they have not happened yet, but they will happen if individuals starting out underestimate there expenses.
Remember the majority of new businesses fail in the first 5 years.
Greg makes valid points here. One could argue that 50% is at the high end of what to expect. It is the concept that is important. Over time landlords spend more than they initially expect to spend, mostly on maintenance, capital repairs and vacancies. The ratios will depend on four key factors
1) the type of properties one owns (apt bldgs, houses, four-plexes, etc)
2) the age and condition of the properties
3) the average amount of the rents charged
4) the quality of property management.
I suspect the range will run from 40% to as high as 50% with the average being about in the middle of the range.
Our long term expenses (8 years+) on houses in Alberta are around 42% of scheduled rents, allowing 10% for Management. We do our own management so our actual costs are around 32%. Our properties are newer and well maintained, rents are at the higher end of the spectrum and our vacancy experience is on the low side. Our costs for repairs and capital expenses are about double what we initially expected when we started in 2001.