Investors
How do I estimate vacancy and maintenance costs (CapEx) for a rental?
By Steve Lockhart
The short answer
A rental analysis that skips vacancy and CapEx is not conservative, it is incomplete. Tenants move, leases end, and units sit empty between renters, so rent is rarely collected every single month.
Full answer
A rental analysis that skips vacancy and CapEx is not conservative, it is incomplete. Tenants move, leases end, and units sit empty between renters, so rent is rarely collected every single month. CapEx covers the expense that does not happen every year but always happens eventually: a roof, an HVAC system, a water heater, appliances, or flooring. A deal that only works when every month is leased and nothing ever breaks has not been tested, and the first quiet year will expose it.
There is no universal percentage that fits every property. Build the vacancy assumption from the local market: how long similar units sit empty, and the property's own rent history when the seller provides it. Build the CapEx assumption from this property: an older home with aging mechanicals needs a larger annual reserve than a newer one. Ask for the seller's rent rolls and two or three years of expense records, talk to a property manager who works the area, and get an inspection so you know what urgent spending actually sits ahead.
Then stress the numbers. Model the deal at a higher vacancy rate and a larger repair reserve than you expect, and ask whether the property still cash flows. These allowances exist to make the analysis match reality rather than optimism. If the property survives the honest version of its own numbers, the cash flow you project is cash flow you can plan around, and I can help you build that model around a specific property.
A note from Steve: nothing on this page is investment, legal, or tax advice. Markets move, and every property is different. Run your own numbers on the specific deal, and talk to your CPA and attorney before you commit.
Go a little deeper
Frequently asked
Questions investors often follow up on
What percentage should I assume for vacancy?
A common starting approach is to assume one to two months of vacancy per year, which becomes a percentage of gross rent, and then test a higher number in your sensitivity check. The right figure depends on the area and property type, so local property managers are the best source for current reality.
What is the difference between CapEx and regular maintenance?
Day to day repairs, a leaky faucet or a broken latch, are operating maintenance, smaller and more frequent. CapEx is the big, infrequent replacement: roof, HVAC, water heater, appliances, flooring. Both belong in the analysis, and CapEx is the one new investors most often forget.
Can I verify these numbers before I buy?
Yes. Request the seller's rent rolls and expense records, check current rents for comparable units, and order an inspection. Anything you cannot verify gets modeled conservatively, so surprises reduce cash flow less than they otherwise would.
The Lockhart Method
The Lockhart Method
Your Home | My Strategy | Proven Results
My strategy: we underwrite every rental with explicit vacancy and CapEx allowances, sourced from the market and the property's own records, then stress both before we trust the cash flow. If a deal only works with perfect tenants and a perfect year, we keep looking.
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