Sensible estimates for maintenance and capex on a new building.

[Elijah Withers]

I’m looking at a 4-plex that is new construction. What sort of numbers should I be using for maintenance and cap ex so that I make sure the investment stays profitable as it ages? Is there a rule of thumb as far as percentages? I’m a newbie and don’t want to overestimate the cash flow in the deal.

[Bob Daniels]

@Christopher Phillips Age of the property is everything when it comes to Capex.

While it's true that tenants will break things regardless if it is new or not. That is what your maintenance account is for. Capex is for big ticket items like your roof, HVAC, hot water heater etc.

A typical HVAC system should last between 15-20 years.  If the HVAC is brand new, and you hold onto the property for 10 years before selling it, then there is a VERY high chance that you will never have to replace the HVAC at all.  If you hold the property for 30 years you will likely replace it once.  Compare this to a situation where the HVAC is already 10 years old when you buy the property, if you hold onto it for the same 10 years you will likely have to replace it once...or twice if you hold it for 30 years.

Secondly, brand new fixtures come with warranties.  So even if your HVAC does go out on you next year for some terrible reason, it will be replaced under the items warranty at no (or minimal) cost to you.  Compare this to buying the HVAC that is already 10 years old.  If that unit goes out next year then you are stuck with your pants down and your checkbook open.

You should always have sufficient reserves, regardless of the age of the unit.  However you are significantly less likely to ever need those reserves when all of the fixtures are new.

Finally, I prefer to set my capex and maintenance in real dollar amounts, instead of a percentage of rent.  An HVAC will cost *roughly* the same amount no matter where you are in the nation.  However a 1300 sq foot home in Oklahoma might rent for $600/month, where as a 1300 sq ft home in San Francisco may rent for $4,000/month.  Both will require the same HVAC unit if a new one needs installed.  If both landlords set aside 10% for capex, then one is setting aside 60/month, the other is doing 400/month even though they will likely have roughly the same expenses, one landlord is putting away nearly 7x as much into the capex fund as the other.  10% of 600 may not be enough, and 10% of 4000 may be way too much.