Cap Ex....an investment killer?

Question

I'm working on my investment spreadsheet and have been doing some reading on the topic of Cap Ex. Some people use a number like 10% of the income, but many suggest itemizing your expenses over their lifespan is the most accurate. I've seen some logical points made that under estimating Cap Ex may not be realized until many years later when a few larger than expected expenses eat up years of "cash flow".

Below is my Cap Ex estimate. I've taken the lifespan and current age of the item (many do not add current age but I don't understand how you can be accurate without it) into account to estimate the remaining years until replacement is needed. For a SFH that rents for $1800 that would be 17% Cap Ex. I understand that Cap Ex is location and age of home dependent, but is it possible for this to be ballpark accurate for these times? I wonder if 10% is so commonly used because people are looking at 10 yr time frames and not 30+? Am figuring these numbers right? Any other variables I'm not looking at?

Your input is appreciated!

Marcus Auerbach · Answer

Ha, no - 15 years ago I was pretty naive. I did not plan beyond what do I need to fix today, so I can rent it out tomorrow. I don't think I even considered inflation. You start thinking about these things after 10 years and when you rehab houses the second time because you did not do it well enough the first time. We have one of our own do inspections, but I used to do them, which is best anyway.

Dean Valadez · Answer

I've also been interested in this and can't seem to find a clear answer from these forums. I've read some people do only 5% of the rent for their CapEx, some say 7%, and some say 10%. For some investors, doing a flat % isn't logical because a roof for a 1000 Sq ft SFR in a D class neighborhood will cost just about the same as a roof for the exact same house in an A class neighborhood, but the A class rent will be 2-3 times more than the D class rent. To me, it doesn't make sense to do a flat percentage as a result.

Thus, I, too, created a spreadsheet similar to yours, but with a column that accounts for 3% inflation. For example, using the roof analogy, a 1000 sq ft roof in my area (Milwaukee, WI) would cost about $8500. But my SFR won't need it replaced for about 10 more years. I doubt that roof will only be $8500 10 years from now. Accounting for 3% inflation, that same roof will cost about $11,423, thus if I saved only $8500, I would be about $3k short. Therefore, in my spreadhseet, I have a Present Value column and a Future Value column, and a column for monthly CapEx amounts based off both the PV and the FV. What I found is the monthly CapEx PV column is about 11% of my SFR rent. The problem I have is that my monthly CapEx FV column is about 22%. Ugg. It's huge and it wipes out my cash flow to the point where I am barely CF positive.

Note: I ended up not accounting for siding costs since the siding is newish and most likely I will have sold the property or have retired by the time it needs updating. Same for driveway, foundation, and window costs. Had I included those, my CapEx PV % would be higher, and for my CapEx FV %, I would be cash flow negative.

To the point, I don't know how others do it, nor if when someone says they only save, say, 7%, is that good enough. If someone says 5 or 7%, they may or may not have decades of experience behind them to qualify such lower numbers. Nothing against them as I don't even have 1 full year behind my experience, but I question what is the most accurate route. To fall in the middle, I will probably use a blend of the PV and FV values so that my CapEx percentage set aside is closer to 15%. I will then place that in a money market or something that earns 3-5% interest to account for the inflation mentioned above. I hope to get my cash flow back in subsequent rent increases...

Alecia Loveless · Answer

@Jordan Fujan In my calculations to buy a property once I’ve gone to the initial viewing I typically put between 5-7% for CapEx depending on the condition of the property and how much work we plan on doing to it upon purchase.

Mostly this is just a guiding figure to let me know how much my expected cash flow will be from the property each month.

My ultimate goal is to build up a cash reserve for each property in the amount of around $15,000 which would be enough for most expenses I would incur.

Bill B. · Answer

You can’t use a percent, none of your capex cost is affected by the amount of rent you collect. You also can’t use any estimates from people not in your market who invest in the same type of property.

I’ve owned a dozen properties for almost 25 years and I’ve spent less than $500 on roofing, and zero on exterior siding/painting. I’d tell you to put 0% for those two items. I’m betting someone who rents out 1950’s homes in the Midwest would use a percent higher than 0%.

Nicholas L. · Answer

@Jordan Fujan

I don't use a percent, I use the actual amount based on what the property is actually going to need

Barry Ruby · Answer

@Nicholas L

It appears that you are conflating costs and expenses

Cost is typically a one time event while expenses occur on a daily basis for line items associated with the operation of the property

Nicholas L. · Answer

@Jordan Fujan

It's more a question of timing than of cost.  As you are pointing out - the expenses will all hit at some point if you own for long enough.

If you buy a house that needs a new roof and a new furnace within a year... then you need to budget for those expenses in a year.  But if they were just replaced... then you still need to budget for them, but the expense is much further out.

This is also why cash flow is only one of the benefits of owning real estate.

Dean Valadez · Answer

Out of curiosity, did you plan on inflation on those big ticket items back 15 years ago when you first were analyzing the property, or after purchase and realized it ate more into your cash flow? Or, just didn't worry about inflation and just adjusted your CapEx numbers as the years went by?

I am curious about the annual inspections. When you do them, do you adjust your CapEx numbers when you see that you have more/less life out those items? Also, do you hire a company to do the inspections or do you do them yourself and just know by your own experience that said items look like they need attention?

Marcus Auerbach · Answer

@Dean Valadez you are correct in your thinking. My oldest rental properties are turning 15 years now and we basically treat everything that is not updated as a future liability.

For example, we replace every year a few driveways starting with the worst, because the majority of them is 60+ years old and like everything else they don't last forever. We do annual inspections and monitor the condition and remaining life expectation of big-ticket items like roofs, windows, HVAC etc

Cap Ex....an investment killer?

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