For multi-unit deals, how do you estimate CapEx and maintenance?

Question

I love analyzing multi-units, and have a couple of different spreadsheets from different sources.  I'm wondering how folks estimate CapEx, maintenance/repairs, and turnover costs?

My current spreadsheets use 10% of gross annual rent for maintenance/repairs and 5% gross annual rent for CapEx.  That's fine, but it seems like it would overestimate costs for a high rent/higher # units property, and underestimate costs for duplexes and lower rents coming in...

Do people use other methods than this?  Maybe % of purchase price (though that would mean low estimates for killer deals, and higher estimates for hot market properties)?

Brian Burke · Answer

I use $/unit per year for each, and the actual amount will vary depending on age and condition of the property, the location, and the size of the property and the units.  For example, on a 100 unit property built in the 1980s in Texas I might use $500/unit/year for maintenance and $300/unit/year for ongoing capEx.  If the units are unusually large I might bump that up a bit. If the property were in California I'd bump it up because of the higher costs in CA.  If it's a 4-plex I'd increase those numbers because of the lack of economy of scale.  If the property were built in 2015 I'd drop the numbers down because they probably won't eat up a lot of maintenance.

In other words, it can only come from experience.  Without experience and a history of similar properties in your own portfolio to draw upon, it's just a wild guess.  And no matter what, straight percentages of the income don't work...unless of course you slide the percentage around for the above-named variables, but at the end of the day your resulting answer will break down to $/unit so you might as well just start there and dump the percentages.

Ahmad Taha · Answer

Curious what's the advantage to calculating it per unit instead of the building, TY

Chris Seveney · Answer

I agree that I do it on cost per unit for repairs and capex for each building. So if the four plex is under one roof then I used a capex number as described above about useful life. I do discount useful life and increase costs to be on safe side.

I have looked into investing in Maine and the biggest challenge I found was many properties did not have tenants paying for utilities. You can have companies meter them individually but being in DC I thought it would take too much personal involvement. Congrats and hope your successful on your ventures.

Tammy Richards · Answer

@Lorenzo Clark, thank you, great idea to connect with local realtors - and yes, my home inspector guy was great, encouraged me to not think I have to make all repairs at once but can prioritize, and told me what needs to be done ASAP/First - I think I could definitely contact him in the future for ideas/referrals and cost estimates.

@Helen  Rolls , yes, I remember that article about CapEx expenses and it made a big impression on me - I suppose what's "easy" about this purchase/CapEx is that everything needs to be replaced fairly soon (half of the heating system, roof, foundation work, and windows!).  So... I had already figured those costs and taken them into account when I put in the offer.

@Chris Seveney, yes, heat is included often in apartments in this area.  I plan on renting to Section 8 tenants, and actually, find the allowance for heat for Section 8 to be pretty accurate for the "normal" building.  One of my strategies will be to put money into energy efficiency to decrease heating costs, and increase my cash flow - Maine has some good loan programs/rebates that can really help tighten up a building, and finance efficient heating, so I'll be taking advantage of those.

Helen Rolls · Answer

Hi Tammy,

I'm only new to real estate investing. I wanted to be sure I was covering all my bases with a CAPEX analysis.  So I analyse each property individually, looking at major features like roof, heating, cooling, hot water, anything likely to break down really.  Then I work out an estimated rest of life (the building inspector did this as part of his report) and then I put in an estimated replacement cost.  I then divided the amount per item by the number of months of life left in them to get a CAPEX cost per month.

I recently read an article by Brandon Turner on why sub-$30K houses will never make you money and he had put together a similar analysis on projected costs.

Cheers,

Helen

Lorenzo Clark · Answer

Hey Tammy...I'd definitely agree with Brian's idea(s).  It's incredible the difference can make just investing in the state (sometimes even the city) next to where you're looking.  With that said, you could at least obtain some "ball park" figures by reaching out to professionals who typically perform/complete routine and major home maintenance.  By estimating costs per hour, and getting ideas on how much a roof could cost, or even price out a new furnace or a/c unit from Home Depot.  These items can help give you a good start.  Also, when you do your home inspection (hopefully), a lot of these guys are familiar with maintenance costs and replacement costs.  Lastly, I'd ask a couple of realtors in your area...often times they hear of "war stories" and assist sellers with minor renovations before they try to list their home.  Best of luck with your 4-plex!! (are you house hacking?)

Tammy Richards · Answer

@Brian Burke that makes a lot of sense - thanks for your response!

I'm just about to close on my first four-unit, which is probably typical of what is available in Maine, in this type of neighborhood, at this price point - which is old housing stock, tons of deferred/poorly done maintenance, and relatively high labor/construction costs.  So it will be an education for me to track expenses for this property over the next few years.

It seems easier  to estimate CapEx - I know the big ticket items and roughly how much a new roof is, how much a furnace is, how much an oil tank is, etc..

For the ongoing/routine items, I'm less sure - though have a pretty good idea of some routine stuff, like lawn mowing, other things feel like a complete guess, like how many plumbing calls will I'll need per year per unit?

So as you say, these things will come with experience.  Guess I'm about to learn a lot!

For multi-unit deals, how do you estimate CapEx and maintenance?

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