Maintenance, repairs, and cap ex

[Travis Cripps]

Hey Guys,

Question regarding projected maintenance, repairs, and Cap Ex. I've heard and read opinions on the anticipated expense percentages when evaluating a property (10% property manager, 10% repairs, 50% rule, etc.). For new construction, do you use a lower repair and cap ex projection? It seems obvious that repairs and maintenance would be significantly less. But from an investing/risk reduction standpoint, it seems unwise to budget zero or 1% for these categories. Any thoughts on this topic? Success stories or brutal experiences with new construction?

Thank you in advance!

Travis

[Andrew B.]

depends on your holding timeframe. the 10% capex rule comes from the idea that in the long run, your repair costs will average 10%. maybe you have no repairs for ten years, then in the tenth year you have repairs equal to 100%, your average is 10% per year. if you plan on selling in your fifth year, no harm in factoring in slightly less. if you keep it forever, will you start at 5% and raise it over the years? that could artificially increase your cash flow in the early years, and then you may realize later on your property isn't cashflowing.

the best way to do it is to calculate the effective life of every product in the house, then divide the replacement cost by the number of years it'll take to fail. that's a lot of work, but it is your true capex reserve.

how you choose to do it is your decision, just make sure your property cashflows at the actual capex amount.