Is everyone seriously underestimating Capex?

Question

I’ve been sitting around for the past few days due to this virus situation and decided to run some Capex numbers on a typical house for the Tampa area.  I apologize if this post is long, but I wanted to try to be comprehensive.  Being a newbie, I may have some numbers that are a bit off, and if so, feel free to challenge them.

So I have seen people assuming Capex of 5-10% of the rent, which would equate to $85-170/mo for a 1,500 sqft 4br/2ba with no garage.

When I run the numbers though, I get: $328mo, or just over19%, so I wanted a sanity check.

I calculated the following (installed costs):

Water heater- $1,000 per 10 years =$8.3/mo

Doors(8int)-     $2,400 per 25 years =$8/mo

Cabinets-         $5,000 per 20 years =$20.8/mo

Counters (gr)- $4,000 per 25 years =$13.3/mo

Backsplash-     $2,000 per 25 years=$6.7/mo

Fridge-               $700  per 20 years=$2.9/mo

Oven-                 $500  per 20 years =$2.1/mo

Microwave-        $300 per 15 years = $1/mo

Dishwasher-      $400 per 15 years =$2.2/mo

Garbage Disp-   $200 per 10 years=$1.7/mo

Washer-              $400 per 15 years=$2.2/mo

Dryer-                  $400 per 15 years=$2.2/mo

Siding-             $12,000 per 25 years=$40/mo

A/C-                  $5,000 per 15 years=$27.8/mo

Door(Fr)-          $2,000 per 30 years=$5.6/mo

Door(Back)-        $750 per 30 years=$2.1/mo

Roof-                 $7,500 per 20 years=$31.3/mo

Tile (500ft2)-     $6,000 per 20 years=$25/mo

LVP(1000ft2)-   $5,000 per 10 years=$41.7/mo

Paint (int)-         $4,500 per  5 years=$75/mo

Gutters (200ft)-$2,000 per 20 years=$8.3/mo

I would probably need some $ for driveway, exterior paint and landscaping as well, but overall with what I have included, it seems 2-4x more then most people even budget for.  Am I way off somewhere?

Andrew Postell · Answer

@Kris L. well, as the home owner you traditionally aren't going to be responsible for a refrigerator, washer, nor dryer.  The interior doors are usually about $50...but I have homes that were built in the 1920s that have the original doors in the home.  And I certainly hope you wouldn't spend $2000 on a front door on a rental property.  It's all an estimate but I think that some of the figures you have are high. But others are reasonable.  Using 10% is pretty normal for most of us but it's up to you.

Kyle J. · Answer

@Kris L.  You've got things on your list that my rentals don't even have (i.e. siding), or that I don't provide (i.e. washer, dryer, microwave).  And quite a few other things that I don't personally consider CapEx (i.e. doors, cabinets, counters, backsplash).  I'm just not going to replace those things in a rental unless they're damaged, and if they're damaged then I'm charging the tenant for it.

For example, with all my time as a landlord, I've only ever had to replace one door.  It was an exterior side garage door that I believe the husband forced open and broke.  The tenants never even called me about it, and I only found out about it when they moved out a short time later and I discovered the exterior solid core door had been replaced with an interior hollow core door.  Obviously I had to completely replace the door, but I just deducted the cost from the tenant's security deposit.  So it actually cost me nothing in the end.

With all that being said though, I think your idea of trying to come up with a CapEx budget is a worthy effort because so many investors fail to plan/budget for it and then get caught off guard when a big expense comes up.  And that can be an expensive mistake.

On almost all of my rentals I've had to replace roofs, water heaters, flooring in the entire home, etc.   At just one property last year I had to put in a new AC ($5200) and re-pipe the entire house ($4100), all within a couple months.  So it can definitely add up.

In the end, it's better to over-budget than under-budget.  Just be careful about adding so many things into your CapEx estimates that nothing ever pencils out to be a "deal" that you actually take action on.

Nicole Heasley Beitenman · Answer

You have a lot of items on your list that I wouldn't think of as capex. A $200 microwave really isn't a capital expenditure.

You're also likely rehabbing the property or purchasing from someone who already rehabbed it, so your capex reserves shouldn't be touched more than once in the first 5 years or so.

Kyle J. · Answer

Cabinets and counters don’t necessarily “wear out”. I have rentals that are over 70 years old with the same cabinets and counters. Granted the cabinets have been repainted, but they’re the same cabinets.

As for the siding, all of my rentals are houses, they just don’t have siding. Or at least most of them don’t. Stucco is common where I’m at, and that never needs to be replaced (just repainted).

I do have one that has siding, but even that doesn’t need to be replaced in my area (also just repainted).

Kris L. · Answer

@Kyle J.

Thanks Kyle.  So I think I understand about the cabinets and counters.  I imagine they eventually wear out, but it seems that tenant damage would happen sooner.

How do you not have to pay siding?  Are you investing with condos or apartments?

Kris L. · Answer

@Nicole Heasley

Yeah the microwave thing did occur to me, but I figured it wasn’t going to change things much one way or the other.  I’m wondering if I’m just getting high estimates on some of the big ticket items like the paint, roof and floors?

Nick Rutkowski · Answer

@Kris L. @Kris L.

If you break it down that way then yes, a house 4 times as large as another house will generally cost you more in CapEx. However, you’ll also have to assume that house will make you more money to cover those expenses.

Kris L. · Answer

@Nick Rutkowski

Sure.  I figured that a lot of Capex items are fairly constant, whether your renting a $50k house at $600/mo or a $300k house at $2,500.  Maybe an a/c is slightly more expensive if you have to cool a larger area and of course flooring and roofs are tied to the size of the house, but Capex wouldn’t be 4x as expensive in the second house, right?

Nick Rutkowski · Answer

@Kris L.

Going off what Andrew said, I’ll only take 5-10% of my gross income and put it towards CapEx. Of course this depends on the tenant and the property class.

It looks like you’ll need to rehab the property so your 1st year CapEx is going to be high. Year 2 should be significantly lower, followed by Year 3,4,5...etc. When I was taught CapEx I was told its more like a reserve rather than item by item. Which is why I think people give it a range because some years are better than others.

You still are on the right idea breaking everything down the way you did. Hope this clarifies a little bit more for you.

Peter Sosnow · Answer

@Kris L.

Thank you for posting as your figures could be accurate. Like you might have done here, I would rather be conservative with my investment forecast.

The potential upside with Capex is your house could be more valuable with the ability to increase rents, along with some tax benefits of depreciation.

Is everyone seriously underestimating Capex?

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