Why is CapEx viewed as a percentage?

Question

Hi Everyone,

On the hunt for my third property, I've been running dozens of properties through our beloved BP calculator. What I've been wondering is, why would CapEx be seen as a percentage of any given rent? Whether a property rents for $800 or $2,000, a water heater is a water heater, a furnace is a furnace, a roof obviously varies by size, but cost is pretty predictable, etc.

Anyway, my thinking is that....just because you stock away a certain percentage towards CapEx or repairs each month doesn't mean that you'll be safe when the unexpected (or even the expected) happens. Isn't it more about having reserves in general? Is there a widely accepted dollar amount people keep in reserves for each property they have?

Feel free to reroute my train of thought, but it just doesn't make sense to me to view these costs as a percentage of an arbitrary number (rent). How do you guys view it?

Russell Brazil · Answer

Ive often pointed out that cheaper properties will have a much higher percentage of the rent going to repairs and capex, and more expensive properties which I prefer have a much lower percentage of the rents going to these items because of the fixed costs of many items.

Russell Brazil · Answer

Any experienced agent or home inspector can look at a roof and estimate the age of it pretty easily.

Grant Rothenburger · Answer

@Derek Luttrell One reason for it is it makes evaluating deals more efficient. And similar to what others have said, even though a water heater is a water heater, if you own a 20 unit and have to replace 4 water heaters, that % capex is in your favor now.

Edward B. · Answer

Yup, still there.

Cap Ex Spreadsheet

by Sam Tato

Edward B. · Answer

@Derek Luttrell, that's essentially it. I would caution you to take it with a grain of salt, though, because when you run the numbers you may wonder how anyone makes money in this game. It's more to give you an idea and inform you as to when you may have some big CapEx coming that you should be prepared for so you can have enough reserves on hand for them. It ensures that you don't get surprised. There used to be a spreadsheet in the BP files that would get you started.

Derek Luttrell · Answer

@Edward B. I like that strategy. So if a water heater is $1,500 and has 4 years left on it, that's $32/month. If a furnace is $4000 and has 6 years left on it, that's $55/month. Roof can be tough because you kind of have to take the seller's word for it's true age, but this sounds like a logical way of mapping things out.

Edward B. · Answer

@Derek Luttrell,

Ideally what you would do is determine what all your capital items are. Estimate their remaining life and cost to fix and then work out how much you'd have to save monthly to ensure hitting those targets.

Might be a little overkill for SFH but it will give you the best idea of where you actually stand. Using a percentage is just better than completely ignoring it, which is what most people do until they get hit with a $5k HVAC wiping out many many months of cash flow.

Russell Brazil · Answer

I dont really draw a line.  I just kind of know it when I see it. Most of my single family rentals are in the $450k range.  My capex and repairs are a very low percentage of my rents compared to some of my friends who invest in Baltimore in the sub $100k range

Derek Luttrell · Answer

@Russell Brazil that makes sense. While it's certainly subjective, what is the price point where you divide "cheaper" vs. "expensive" for MFR and SFR?

Trenton Miller · Answer

That's exactly what CapEx is for, reserves.  There is no rule stating that you have to look at this as a percentage.  However for analyzing deals in general a percentage is easier.  You can tailor this number to meet your needs and goals as well.

My train of though on this is just because one rent may be higher than the other, a proportional amount should be put towards CapEx reserves for each property.

Why is CapEx viewed as a percentage?

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