Vacancy allowance
Even in tight markets, every rental sits empty periodically — between tenants, during renovations, or while screening applicants. A common vacancy allowance is 5–10% of gross annual rents. On a $2,000/month rental at 8% vacancy, that's $160/month or $1,920/year off effective gross income — real money that a full-rent projection ignores.
CapEx reserve
Capital expenditures are large, infrequent costs: a new roof ($8,000–$20,000), HVAC system ($4,000–$10,000), water heater ($1,000–$2,000). You won't pay these every year, but you will eventually. Setting aside 5–10% of gross rents each month means the cash is there when the bill arrives instead of coming out of pocket in one shot.
Combined effect on returns
A 8% vacancy allowance plus a 8% CapEx reserve reduce your effective cash flow by 16% of gross rents — $384/month on a $2,400 gross-rent property. That's $4,608 per year that won't show up in a naively modeled return. Deals that look solid before these reserves can turn marginal or negative once they're counted.
Frequently asked questions
How much should I set aside for CapEx?
5–10% of gross rents is a common range. Older properties and those with aging roofs or mechanicals warrant the higher end.
What vacancy rate is realistic?
In most markets 5–10% is a reasonable planning assumption; high-demand urban markets may be lower, less stable markets higher.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.