What do you set aside for capex and repairs?

Question

Do you have a rule of thumb when you’re searching for buy and hold deals? Are you setting aside 10% of prospective rental income for capex and 10% for repairs regardless, or fine tuning it based on factors like the age of the house/equipment?

I tend to err on the side of caution so I’d like to overshoot my potential budget expenses, but I don’t know if 10% for each is prudent.

Jeff Copeland · Answer

If you really want to fine tune it, the math is not that difficult. Just take the cost of the capex (which will differ for each property based on size and number of components), divide it by its expected service life, and then add up the various components. For example:Roof: $15,000 / 30 years = $500 per yearHVAC: $5000 / 15 years = $333 per yearWater Heater: $750 / 15 years - $50 per yearFor these three items, your reserve for capex would be $883 per year, or $74 per month.

Llewelyn A. · Answer

@Billy Archer If you did an inspection report on your Investment, you can easily find what is the recommended replacement for major equipment and their costs. I actually try to make a 10 year plan in the way that @Jeff Copeland recommended rather than the full life expectancy. You just never know when something happens that was completely unexpected.As an example, you can accumulate money for the replacement of your Car tires. But what happens if you wind up with a deep nail in it and it needs to be replaced?My time horizon is always adding up all the Cap Ex in 10 years and dividing it by 10. Makes the math simple as well.For Maintenance, that should be determined by the amount of work needed and that depends on whether or not the Investment is high maintenance or not.Older homes definitely are high maintenance. But brand new homes, hopefully not! I would look at the history of repairs per month and then budget a monthly maintenance a bit over the average monthly maintenance for the past 2 years or so.While everything is all a guess, better to guess with thoughtful analytics than just making things up.

Josue Vargas · Answer

@Billy ArcherI ballpark CaPex depending on the condition of the obvious major items in need to repair within 5 years... anything between 8-15%Maintenance, I have always used 5% and that's enough for the type of properties that I own/buying (good condition and class A/B market). I suspect this may be a little higher for other type of properties such apartments/duplex and above, but can't tell because I don't own any of these.

Greg Carrier · Answer

@Ike ADIGWE. I wish I could tell you that but we have nothing near $3500 rent properties. Here is what I have gleaned from others though. A furnace for a 1000 square foot house is not half the cost of a furnace for a 2000 square foot house. Same goes for roofs, AC units, driveways, etc. The houses we own tend to be small so if I had larger homes I would probably drop the percent a little bit while considering if the larger (and probably nicer house) has any unique features that would bump the amount up like swimming pools, nonstandard (nonshingled) roof, pavers for walks and driveways etc.Good Luck!

Ike ADIGWE · Answer

@Greg Carrier; what if the rental income is high, say $3500. Do you still put aside 10% ($350) every month for CAPEX especially if it’s a newer property.

Greg Carrier · Answer

I wing it at 10%. No one knows of all the furnaces I own which one will die in ten years and which one will die in 30 years. In the house I live in the original furnaces (2) are still functioning and the house was built in 1995. We have had one repair on them in 14 years. The house I moved from had a furnace in it from 1968 and it ran without a hitch for the 10 years we lived in the house. Roof life varies a lot depending on insulation in each house you have and how bad weather is where the house is located. AC units have been the hardest for us to guess as some tenants never change furnace filters and some are really good at doing it. With all the other things you have to keep track of, I suggest just sticking to the 10%.

Benjamin Mccracken · Answer

@Llewelyn A. How do see the history of repairs if you are analyzing a deal to purchase?

Billy Archer · Answer

@Llewelyn A. Thanks for the answer. Do you do this every time you look at a deal? I imagine that is a lot of research just to check the viability of it. I agree in principle to crunch all numbers once you're ready to make an offer, but I thought there some kind of metric that can help you see if the deal is worthy of dissecting. If you couldn't accurately gauge the cost of each of these capital expenditures in that market, would you run them all by your trusted contractor/local property manager?

Billy Archer · Answer

@Jeff Copeland thanks, this is golden.