newbie question: cap ex number to use for an apartment?

Question

Hi all. Newbie here and new to calculating the deal. What cap ex number or % do you use for calculating expenses on an apartment, or is there no cap ex for an apartment and instead is only maintenance and HOA ? The apartment is 3rd floor, facing the ocean in San Diego. Thanks!

David Faulkner · Answer

Calculate CapEx from the ground up, not as a %.1)What are all the items in the apartment that will go bad, and need to be replaced over time, and that you the owner are responsible for (not covered by HOA)?2)What are the costs to replace each of those line items?3)What is the usable lifetime of each of those line items?4)What is the cost/month you therefore need to save to replace each of those line items?5)Sum all line items in 4, round up and/or add some margin, and you have your monthly CapEx expense to save into your CapEx reserve account.6)Bonus: What is the approximate current age (in months) of each of those line items? Multiply that by the cost/month in 4 for each line item, sum them up, round up or add margin, and you now have how much you need currently in cash in your capital reserve account. Note that this amount is what changes if everything in the unit is new, not the monthly CapEx expense, because that new stuff will still wear out at the same rate.

John Jacobus · Answer

@Katerina McKnight Further to Dan's and Geoff's feedback, you will need to budget for general maintenance expenses in addition to cap ex. Geoff outlined the framework that will allow you to calculate your NOI. However, cap ex reserves are typically a "below the line" item, which means they are deducted as a line item after NOI is calculated. The result of this is the true cash flow for the unit. For a single apartment unit that is part of a larger community, your cap ex reserve will be lower than if you owned a standalone home. Often times, the major sources of cap ex items are covered by your apartment community/HOA and you pay for this through HOA dues. I support Dan's recommendation to hire a local contractor and/or consult with a property manager who is familiar with units similar to the one you own in your area. They can provide you with a more realistic cap ex reserve, though I would be surprised if it exceeded $250/month. Many new investors don't properly reserve for cap ex and the results can be awful. Therefore, it's great that you're planning ahead and setting aside reserves for unexpected cap ex that could otherwise disrupt your ability to continue renting your property.

Geoff Nowlin · Answer

Hmm. Not sure I understand your question. We use a thing called the "Capitalization Rate" to describe how much cash a rental property throws off. Here is quick math:Gross Revenues- Vacancy- Expenses (including HOA, Common Area Maintenance, and every other expense)= Net Operating Income- Debt Service (your Principle, Interest, Taxes, Insurance Payment)= Positive/Negative Cash FlowCap Rate = NOI/Property Value. So if the property has $10,000 NOI / $100,000 Value. The Cap Rate is 10%. The property throws off 10% cash. Hope that hits the question.Geoff

Jessie Tetreault · Answer

100 percent what @David Faulkner said. You need to have a maintenance expense and cap ex. Bigger priced items. Roof, water heaters, furnace, drive way, hvac, etc. Estimate the life span of these items, find out how much they cost and figure what you would need to save per month to replace them without killing yourself. Cap ex is not a set number or percentage. It really varies with the property. @Katerina McKnight Hope this helps.

John Jacobus · Answer

@Katerina McKnight Further to Dan's and Geoff's feedback, you will need to budget for general maintenance expenses in addition to cap ex. Geoff outlined the framework that will allow you to calculate your NOI. However, cap ex reserves are typically a "below the line" item, which means they are deducted as a line item after NOI is calculated. The result of this is the true cash flow for the unit. For a single apartment unit that is part of a larger community, your cap ex reserve will be lower than if you owned a standalone home. Often times, the major sources of cap ex are covered by your apartment community/HOA and you pay for this through HOA dues. I support Dan's recommendation to hire a local contractor and/or consult with a property manager who is familiar with units similar to the one you own in your area. They can provide you with a more realistic cap ex reserve estimate, though I would be surprised if it exceeded $250/month. Many new investors don't properly reserve for cap ex and the results can be awful. Therefore, it's great that you're planning ahead and setting aside reserves for unexpected cap ex that could otherwise disrupt your ability to continue renting your property.

Dan H. · Answer

Apartments have cap expense. They vary by locale as both lifespan and cost is local dependent. In San Diego a kitchen is almost $40/month cap expense. In San Diego roofs last a while due to mild temps. However costs are likely higher than most locals. You either need a local person to provide you their numbers or start with an existing cap expense worksheet and modify the lifespans and costs for your area. Eliminate anything that is covered by the apartment complex (roof, foundation, siding, water heater (likely), heater (likely), window (likely), most plumbing, most electrical, etc.). Items to include is everything in kitchen and bathrooms, flooring, interior electrical, interior plumbing, and interior walls (paint). Good luck

Katerina McKnight · Answer

Thanks, Geoff.