Estimating Capital Expenditures

[Kevin Luttrell]

Hello,

I was wondering if some experienced investors out there could provide some quick tips/advice on estimating CapEx when analyzing potential deals. Obviously this is impossible to perfectly predict and I know it can vary significantly by area, property size, condition, etc, but do you have some general guidelines/principles you stick to when doing the up-front analysis? Like a percentage of the rent, or a range depending on the condition of the property?

Any insight would be greatly appreciated. Thanks! 

[Costin I.]

@Kevin Luttrell - Quick numbers? 8% vacancy, 10% PM, 5% CapEx and 5% Maintenance.

Here's an BP article that does a great job itemizing CapEx: real-estate-capex-estimate-capital-expenditures

Just make sure you don't confuse Net Operating Income (which is Gross Rent minus Operating Expenses) with Net Annual Income (which is the annual cash flow and is the NOI minus mortgage expenses and vacancy). And make sure to account for the following expenses:

1) Mortgage
2) Mortgage insurance (PMI or MIP) or FHA Risk base
3) Property Taxes
4) City Taxes
5) HOA (Home Owner's Association) Dues and Fees and Assessments
6) Insurance
a) Property Hazard Insurance (0.3-0.45%)
b) Flood Insurance
c) Earthquake Insurance
d) Umbrella Insurance
7) Vacancy Rate (usually 8% - the equivalent to one month a year, or 5-6% if multifamily and/or if experienced, if not use 8%)
8) Utilities (you’ll have these if your tenant is not covering them and/or during vacancy)
a) Water § Sewer § Garbage
b) Electricity
c) Natural Gas
d) Propane
9) General Maintenance (usually 5%)
a) Upkeep § Landscaping
b) Snow removal
c) Repairs
d) New Appliances
e) Make ready
10) Capital Expenditures (usually 5%, higher is the property is old and obsolete, less if fully rehabbed and all mechanicals and roof are new)
11) Property Management (8%, even if you self manage, your time still has value and there might be a time when you'll want to be completely hands off or you'll not be able to do it, vacation, retirement, etc.), including...
a) Office Supplies (e.g. stamps, envelopes)
b) Software
c) Gas/Mileage
d) Advertising + Payroll
e) Concessions
f) Lease loss
g) Lease renewal fees
12) Lawyer/Law office/Legal fees
13) Accounting/Bookkeeping/CPA/Tax preparer/Tax advisor

If you want to be precise, maintain a spreadsheet with the mechanicals that calculates exactly how much you need to put aside, per year, per month, when: