How do you calculate CapEx on your rentals?

Question

What is the prevailing wisdom (if there is such a thing) on calculating for future capital expenditures (CapEx) and maintenance for SFH rental properties, when running the numbers on a potential property?

Some people say $150/mo (I think @Brandon Turner does in his book), while others suggest a % of the purchase price.  I don't know how a % of the purchase price would be correct, since a 1000SF house that costs $50K is going to need just as much maintenance/capex as one that costs $150K.

For a SFH that is in reasonably good condition at purchase, what is a realistic amount to put in your calculations for reserves?

Andrew Kerr · Answer

@Fritz Liedtke I have found 5-15% of gross rents seems to work out well for maintenance. The newer the property the lower the percentage. If you have really old properties, budget a higher amount. Also factor in tenant quality (lower income tenants tend to be harder on units) and finishes (higher end homes have higher end finishes).

For Capex, you can do a set amount per month, use a percentage (similar to above) or try to estimate actual expenses. I have a personal rule of thumb but it could really vary from person to person.

Larger complexes get reserves studies done that review the major systems, their effective age, estimated cost to repair at the end of their effective age, capital on hand or reserves on hand. The study then gives you an idea if your capex cash on hand is ideal and what a monthly target should be to meet the property needs.

If you are trying to figure it out for a smaller property, I like using real costs, similar to how a reserve study is done. How old is my roof, when do I think it will need to be redone and what would it cost. How old is HVAC system, when do I think it will need to be redone and what would it cost, then figure it out from there. Just go down the list of major items. If a roof will cost $5,000 and it will need to be redone in 2-3 years, you should probably be setting aside $2,500 a year, or a little over $200 a month.

Hope this helps!