What goes into calculating the CapEx in a deal analysis?

Question

Hi BP Community,

I'm a total newbie to real estate investment game and I've been analyzing a few deals. My question is, what do you all including as a CapEx in your deal analysis?

CapEx should include everything that has a lifespan right? So for example, according to Google, a dishwasher has a lifespan of about 10 years, a garbage disposal is about 8 years, and an air conditioner is about 12 years.

Sticking with the dishwasher example from above, at my local big box store, the mid range model of dishwasher is about $600 dollars. So $600/10 years/12 months = $5 per month of CapEx for the dishwasher. I did this with everything in my personal residence that has a lifespan and came up with about $150 per month of CapEx.

Since I'm totally new to this, I conservatively estimate that I can get $600 per month in rent, so 25% of my rent is a CapEx. When I entered this into the BP buy and hold calculator, it actually gave me a warning that it should be a percentage of the monthly rent instead of the monthly amount.

What are your thoughts? Does this sound about right?

Thanks for the help,

Pete

Michael Noto · Answer

These are the items I include for CapEx expenditures. I tend not to include appliances.

- roof

- HVAC

-windows

- major electrical

- major plumbing

- siding

In general I don't look at unit turnover type issues as cap ex.

Justin V. · Answer

@Peter Korty

Hi peter,

You definitely have the premise, but don’t forget labor/installation.

I mostly have 120 year old 1600-2000 sqft duplexes and figure my cap ex at between $300 and $350 per month. I think I started with a calc I found on here and adjusted for my market as I had to pay for some of these repairs. Assuming a property is similar to what I’m used to I’ll just plug my $325 in or adjust accordingly.

Also I know this was just part of the example, but I don’t put disposals in my rentals because I’ve heard a few horror stories about what can be sent down them by tenants (aquarium gravel and boot mud were my favorites).

Best of luck and to your success!

-Justin

Laura Janosko · Answer

Lenders typically calculate $250-$500/unit (lower being new construction/newly renovated and the higher being older with little no renovations)

Aaron Montague · Answer

@Peter Korty

For my basic evaluations I start with $200/month for a new(ish) duplex or SFH.  For a giant, sprawling 4 family with a roof that I can see needs repairs immediately I'll bump that up to $400/month.

Once I figure it is worth pursing I take the actual items and calculate the total just as you did.  Roof will be 25k and last me 25 years (1000/year or 83.33/month).  Add everything up and you get the specific Cap Ex number you can plug into a spreadsheet for in depth evaluations.  Most residential places will fall between $200 and $400 per month.

Aaron Montague · Answer

Why don't you include appliances? In my view it'd be nice to toss $5/month towards the new stove when I do finally need it.

Reginald Ross · Answer

@Peter Korty

I will vary based on property specifics but as a starting point, I’ll use 1% of asset value per year or 10% of gross rent, whichever is greater.

If it’s an older asset, I may adjust upward.  A brand new house will be lower.

Example:  I have a house worth $100k that rents for $1200/month.

1% of $100k would be $1000/yr in opex.

10% of gross rent would be $120/month or $1440/yr in opex.

If the house was built in 1928 and has deferred maintenance, I might double the highest number.

If the house is brand new I might cut the lowest number in half.

The more experience you get, the more intuitive it will become.

Trenton Miller · Answer

Correct.  It will be property specific.  however for quick analyzations 8% to 12% is generally acceptable.

Peter Korty · Answer

Thanks for the help guys! I really appreciate it.

So would you say that when you analyze a property, it is almost always specific to that property? You wouldn't just generalize things like the CapEx?

Thanks for the help,

Pete

Matt Leber · Answer

@Peter Korty you’re doing it correctly. You also may want to consider would be the actual age of the component. I do it for each property I individually analyze and usually come in around $150-250 range. Maybe a bit higher for multifamily bc you generally have more roof area and double, triple, quadruple the components.

But this also begs the question: Does this property that you’re going to rent for $600 actually have a dishwasher? Most affordable housing options I’ve come across do not have a ‘luxury’ appliance like a dishwasher.

Trenton Miller · Answer

Major home repairs are typically included in CapEx as well, for example replacing roofing.  Keep in mind that C & D class neighborhoods tend to need more major repairs than A & B class neighborhoods, so the allocated percentage will fluctuate.

What goes into calculating the CapEx in a deal analysis?

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