How do you plan for CapEx?

Question

Obviously capital expenses don't happen the same way we save up for them so I'm curious as to how you all plan for them in your investments. Do you religiously allocate a certain % of rental income per month for CapEx?

I am currently planning for CapEx by treating it like an emergency fund. I analyze each of my properties and determine an amount to save based on their condition and upcoming repairs. Then, when there is a repair where I need to spend money from my CapEx savings, I use ALL of my cash flow from all my properties to cover for the expense until the fund is saved back up.

Here is what I have so far in my portfolio:

Quadplex 1 - 2 units rehabbed, 50% of systems upgraded (water heater, HVAC, etc) - $10,000 set aside for CapEx.

Quadplex 2 - 2 units rehabbed, 50% of systems upgraded - $10,000 set aside for CapEx.

SFR - Completely rehabbed, updgraded systems, $4,000 set aside for CapEx.

Total: $24,000 set aside for CapEx.

If any repair is needed, I will use the $24,000 saved for CapEx and then use all available CF to save the fund back up to $24,000. Once I have the $24,000 saved, I will use all the available CF to save for the next deal.

Thoughts?

Jaysen Medhurst · Answer

@Timothy VanWingerden, I use 7.5% of GSR in my initial pro forma analysis. Then, if I get serious about a property, I model out what I expect the actual CapEx to be. I think @tim herman does a good job of explaining this approach and may have shared a spreadsheet in the past.

JD Martin · Answer

Once you have a large enough reserve of cash you quit worrying about percentages, especially if you rehab these units on the front end. Roofing, plumbing & electrical systems, HVAC and foundation are usually your biggest "eat it" expenses that may arise in a rental property - meaning most everything else can (if necessary) be DIY or have less expensive alternatives. If you need a rewire, or a new roof, or new plumbing lines, these are things that can take a big bite out of things, usually need to be done by a professional, and usually will render the unit(s) uninhabitable. Other big expenses - flooring, kitchen cabinets, drywall repair, etc - can usually be worked out if you end up tight on funds.

Biggest problem people run into is not doing full rehabs, then setting aside nothing for capital costs, having units with low cash flow, deferring basic maintenance until things completely die, and trying to live off of the cash flow. One, several, or all of these issues. Every property - even rehabbed ones - will eventually need capital improvements, but if you have hit these on the front end you usually have a good 5-10 year window before anything significant comes up. If you have been building cash reserves and cash flow during that period, you usually don't even think about it when issues happen. And if you have been maintaining your units well during that period, you'd be surprised how many things can be repaired or rehabbed without starting from scratch.

This of course is short of outright vandalism or disaster, which should be covered by insurance.

How do you plan for CapEx?

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