Conservative Assumptions: Vacancy, Repairs, CapEx, and Reserves Explained

Quick Summary: Properly budgeting for vacancy, repairs, capital expenditures, and reserves separates profitable rental properties from money pits. Learn conservative assumptions by market type, property age, and asset class to ensure your deals can weather economic downturns and unexpected expenses. Model these critical expenses with the Rental Property Calculator to stress-test every deal before you buy.

The difference between amateur and professional investors isn't finding deals—it's properly budgeting for the inevitable costs of ownership. Vacancy happens. Things break. Systems need replacement. And you need cash reserves for all of it.

This guide breaks down each expense category with specific percentages, real-world examples, and decision frameworks to ensure you never get caught undercapitalized.

The Four Pillars of Conservative Underwriting

1. Vacancy - Time between tenants 2. Repairs & Maintenance - Ongoing upkeep 3. Capital Expenditures (CapEx) - Major system replacements 4. Cash Reserves - Emergency fund for the unexpected

Most new investors underestimate all four. Let's fix that.

Vacancy: Budget for Time Between Tenants

What is Vacancy?

Vacancy is the period when your property sits empty between tenants—no rent collected, but expenses continue.

Types of vacancy:

• Physical vacancy: Unit is actually empty
• Economic vacancy: Unit is occupied but tenant isn't paying
• Turnover downtime: Days/weeks between move-out and move-in

Standard Vacancy Assumptions

By Market Strength:

By Property Type:

Real Example: Vacancy Impact

Property: $2,500/month rent Gross Annual Income: $30,000

Scenario A: Optimistic (2% vacancy)

Vacancy Loss: $30,000 × 0.02 = $600/year
Effective Income: $29,400

Scenario B: Conservative (8% vacancy)

Vacancy Loss: $30,000 × 0.08 = $2,400/year
Effective Income: $27,600

Difference: $1,800/year ($150/month) in cash flow

How to Reduce Vacancy

Tenant Retention:

• Fair rent increases (3-5% vs. market jumps)
• Responsive maintenance (fix things fast)
• Professional management
• Lease renewal incentives

Fast Turnover:

• Price at or slightly below market
• Professional photos and listing
• Show property immediately
• Quick application processing
• Pre-market to existing tenants' friends

Smart Timing:

• Avoid winter move-outs (cold climates)
• Target spring/summer lease ends
• Align with school calendars (family rentals)

Your Action: Use 5-8% for most markets. Increase to 10%+ for seasonal rentals or weak markets.

Repairs & Maintenance: The Ongoing Costs

What's Included

Routine Maintenance:

• HVAC filter changes
• Gutter cleaning
• Lawn care / snow removal
• Pest control
• Small repairs (leaky faucets, doorknobs)

Reactive Repairs:

• Emergency plumbing
• Appliance fixes
• Broken windows
• Drywall holes
• Lock replacements

Tenant Turnover:

• Painting between tenants
• Carpet cleaning/replacement
• Minor repairs from normal wear

Standard Maintenance Assumptions

By Property Age:

By Property Type:

Real Example: Age Matters

Property A: 3 years old

• Rent: $2,000/month = $24,000/year
• Maintenance (4%): $960/year ($80/month)
• Why low: Everything under warranty, minimal issues

Property B: 25 years old

• Rent: $2,000/month = $24,000/year
• Maintenance (10%): $2,400/year ($200/month)
• Why higher: Constant small repairs, aging systems

Annual difference: $1,440 ($120/month cash flow impact)

Your Action Plan

Conservative Rule: Use 8% of gross rent as a baseline, then adjust:

• Subtract 3% for new construction
• Add 3% for properties over 30 years old
• Add 2% if you self-manage (your time fixing things)

Capital Expenditures (CapEx): The Big Replacements

What is CapEx?

CapEx (Capital Expenditures) are major component replacements that occur every 10-30 years:

Major CapEx Items:

• Roof replacement
• HVAC system
• Water heater
• Appliances
• Flooring (carpet, hardwood)
• Exterior paint/siding
• Windows
• Plumbing/electrical upgrades
• Driveway/parking lot

CapEx ≠ Repairs

• Repair: Fix existing water heater ($300)
• CapEx: Replace entire water heater ($1,500)

The CapEx Schedule

CapEx as Percentage of Rent

Standard assumption: 5-10% of gross rent

Example Property:

• Rent: $2,000/month = $24,000/year
• CapEx Reserve (8%): $1,920/year ($160/month)

Over 10 years:

• Total CapEx budget: $19,200
• Expected needs: New HVAC ($8K), Water heater ($1.5K), Carpet ($3K), Paint ($6K) = $18,500
• Budget is adequate ✓

When to Increase CapEx Reserves

Use 8-12% if:

• Property is 20+ years old
• Major systems near end of life
• Deferred maintenance evident
• You inherited older components

Use 3-5% if:

• New construction (0-5 years)
• Major systems recently replaced
• Warranty coverage in place

The Biggest CapEx Mistake

Don't skip CapEx reserves because "everything looks good now"

Real Story: Investor bought property, skipped CapEx budgeting:

• Year 1: No issues
• Year 2: Water heater fails ($1,800)
• Year 3: HVAC dies ($9,000)
• Year 4: Roof leaks, needs replacement ($15,000)
• Total unexpected: $25,800 over 4 years

If they'd budgeted 8% CapEx:

• $2,000/month rent × 8% = $160/month = $7,680 over 4 years
• Still short $18,120, but less painful

Your Action: Always budget 5-10% for CapEx. It's not "if" things break, it's "when."

Cash Reserves: Your Safety Net

What Are Cash Reserves?

Cash reserves are liquid funds set aside to cover:

• Unexpected vacancies
• Emergency repairs
• CapEx that comes earlier than expected
• Tenant nonpayment
• Carrying costs during refinance
• Economic downturns

Not to be confused with:

• Down payment (used to purchase)
• CapEx reserves (budgeted from cash flow)
• Equity (tied up in property)

How Much to Reserve

Minimum Standards:

PITI = Principal, Interest, Taxes, Insurance

Example Calculation:

• Monthly expenses: $2,500 (mortgage + taxes + insurance + OpEx)
• Reserve target: 6 months
• Required reserves: $15,000

Why You Need Reserves

Scenario: The Perfect Storm

• Month 1: Tenant moves out unexpectedly
• Month 2: HVAC breaks during showing period ($8,000)
• Month 3: Still no tenant (slow season)
• Month 4: Finally rented at slightly lower rate

Costs:

• 3 months lost rent: $6,000
• HVAC emergency: $8,000
• Carrying costs (mortgage, taxes): $7,500
• Total hit: $21,500

Without reserves: Forced to sell, use credit cards, or default With reserves: Weather the storm, property back to profitability

Building Your Reserve Fund

Start: 3-6 months of expenses Goal: 6-12 months of expenses Long-term: One year per property

How to build:

• Save from cash flow monthly
• Set aside portion of rent increases
• Allocate tax refunds
• Bonus/windfall allocation

Reserve Account Strategy:

• Emergency fund: High-yield savings (immediate access)
• CapEx fund: 12-month CD ladder (planned expenses)
• Opportunity fund: Brokerage account (deals, growth)

Regional Variations: Adjust for Your Market

High-Cost, Low-Yield Markets (CA, NY, HI)

Challenges:

• Lower rent-to-price ratios
• High property taxes
• Expensive repairs/labor
• Slower tenant turnover

Conservative Assumptions:

• Vacancy: 5-8%
• Repairs: 5-8%
• CapEx: 6-10%
• Reserves: 8-12 months expenses

Example: San Francisco

• $1M property, $4,000/month rent
• Taxes: $12,000/year (1.2%)
• Vacancy (6%): $2,880
• Repairs (6%): $2,880
• CapEx (8%): $3,840
• Total variable expenses: 20% of gross rent

Midwest/South Cash Flow Markets

Advantages:

• Higher rent-to-price ratios
• Lower property taxes (usually)
• Cheaper repairs/labor
• Faster tenant turnover (more renters)

Conservative Assumptions:

• Vacancy: 5-7%
• Repairs: 8-12% (older housing stock)
• CapEx: 8-12%
• Reserves: 6-9 months expenses

Example: Cleveland

• $100K property, $1,200/month rent
• Taxes: $2,400/year (2.4%)
• Vacancy (6%): $864
• Repairs (10%): $1,440
• CapEx (10%): $1,440
• Total variable expenses: 26% of gross rent

Resort/Seasonal Markets

Challenges:

• High seasonality (50%+ of revenue in 3-4 months)
• Intense turnover (weekly/daily in STRs)
• Wear and tear
• Off-season carrying costs

Conservative Assumptions:

• Vacancy: 30-50% (STR)
• Repairs: 10-15%
• CapEx: 10-15%
• Reserves: 12+ months

Property Type Differences

Single-Family Homes

Standard Assumptions:

• Vacancy: 5-8%
• Repairs: 5-10%
• CapEx: 5-10%
• Reserves: 6-12 months

Advantages:

• Lower turnover (families stay longer)
• Tenant maintains yard/minor items
• Easier to sell if needed

Disadvantages:

• All CapEx on you
• One vacancy = 100% vacancy
• Typically higher price per door

Small Multifamily (2-4 units)

Standard Assumptions:

• Vacancy: 6-9%
• Repairs: 8-12%
• CapEx: 8-12%
• Reserves: 6-9 months

Advantages:

• Diversified vacancy risk
• Economies of scale on repairs
• Higher income per property

Disadvantages:

• More tenant management
• Shared systems (one issue affects multiple units)
• Higher turnover

Large Multifamily (5+ units)

Standard Assumptions:

• Vacancy: 5-10%
• Repairs: 7-10%
• CapEx: 7-12%
• Reserves: 6-12 months

Advantages:

• Professional management viable
• Vacancy diversification
• Economies of scale

Disadvantages:

• Commercial financing (harder)
• More regulation
• Higher liability

The Complete Conservative Budget Example

Let's put it all together with a real-world property:

Property Details:

• Purchase Price: $250,000
• Monthly Rent: $2,200
• Annual Gross Income: $26,400
• Property Age: 18 years
• Location: Midwest (moderate taxes)

Operating Expenses (Annual):

Operating Expense Ratio: 54.6% (conservative, appropriate for 18-year property)

Net Operating Income (NOI):

$26,400 - $14,420 = $11,980

Financing (25% down, 7%, 30 years):

• Loan: $187,500
• Monthly payment: $1,247
• Annual debt service: $14,964

Cash Flow:

$11,980 (NOI) - $14,964 (debt service) = -$2,984/year

Verdict: Negative cash flow with conservative assumptions—PASS or negotiate lower price.

But what if seller used optimistic assumptions?

• Vacancy: 0% (assumes always rented)
• Repairs: 3% (too low for 18-year property)
• CapEx: 0% (ignoring future replacements)
• Optimistic NOI: $16,632
• Optimistic cash flow: $1,668/year

The trap: Looks profitable with rosy assumptions, but reality will be negative cash flow.

Conservative vs. Aggressive Assumptions: The Real Cost

Property: $300K, $2,500/month rent

Aggressive Assumptions

Vacancy: 0%
Repairs: 3%
CapEx: 0%
Variable expenses: 3% = $900/year
NOI: $29,100

Conservative Assumptions

Vacancy: 6%
Repairs: 8%
CapEx: 8%
Variable expenses: 22% = $6,600/year
NOI: $23,400

Difference: $5,700/year ($475/month)

Over 10 years:

• Aggressive projection: $291,000 NOI
• Conservative reality: $234,000 NOI
• Shortfall: $57,000

That's enough to wipe out your down payment and profits on many deals.

How to Stress Test Your Assumptions

The 5-Point Stress Test

1. Double Your Vacancy Assumption

• Standard: 6% vacancy
• Stress: 12% vacancy
• Can you still cover the mortgage?

2. Add 5% to Maintenance

• Standard: 8% repairs
• Stress: 13% repairs
• Still cash flow positive?

3. Assume One Major CapEx Hit Early

• Budget: $2,000/year CapEx
• Stress: $10,000 roof in Year 2
• Do you have reserves?

4. Model 30% Rent Drop

• Standard: $2,000/month
• Stress: $1,400/month
• Can you survive 6 months?

5. Combine All Three

• Higher vacancy + higher repairs + major CapEx
• This is "recession mode"
• What's your monthly shortfall?

If the property fails stress tests: Either pass on the deal or negotiate a much lower price.

Building a Conservative Underwriting Template

Here's your go-to template for any property:

Quick Reference Budget

Total Operating Expenses (Target): 45-55% of gross income

Cash Reserves (Minimum): 6-12 months of PITI + OpEx

The Bottom Line

Conservative assumptions are the difference between investors who build wealth and investors who go broke. Yes, you'll pass on more deals. Yes, your projected returns will look lower. But you'll also:

Sleep better:

• No panic when the HVAC dies
• No scrambling during 3-month vacancy
• No credit card debt to cover repairs

Build sustainably:

• Actual performance matches projections
• Reserves grow over time
• Portfolio expands responsibly

Survive downturns:

• Prepared for rent decreases
• Can weather extended vacancies
• Won't be forced to sell at the bottom

Key Takeaways:

• Budget 5-8% for vacancy (higher in weak markets)
• Budget 8-12% for repairs (higher for older properties)
• Budget 5-10% for CapEx (never skip this)
• Maintain 6-12 months cash reserves per property
• Stress test every deal before buying
• Better to pass on marginal deals than overlever

Use the Rental Property Calculator to model these conservative assumptions on every deal. The calculator lets you adjust vacancy, repairs, and CapEx percentages to see exactly how they impact your cash flow and returns.

Remember: Optimistic assumptions might win you the deal, but conservative assumptions will keep you in business for decades.