How to calculate CapEx

Question

Hey all, I read the chapter on calculating CapEx in the BiggerPockets investing in rental properties book by Brandon Turner and it had CapEx at $182 and change per month.  But I saw on a recent deal that someone had their CapEx at $45 a month and I am wondering how they got that calculation since it is so much cheaper than the one in the book which I am kind of using as a guide or rule of thumb.  Can anybody please tell me how they calculate their CapEx for their rental properties?  Any and all help or advice is appreciated, thank you.

Marcus Auerbach · Answer

@Nick D. using a % of income does not make sense gross or actual. You have to estimate capex for let's say the next ten years (new roof + new HVAC + XYZ) and then divide that by 120 months.

My market Milwaukee has an old housing stock, mostly 60 to 120 years old. So you can buy a property that has the capex clock reset recently or you can buy one where everything is towards the end of it's useful life. We usually spend about 60-80k on a total reset, then you know capex for the next 30 years is close to zero.

I often see people use 5% of rental income, which comes out to $75 per month or $9,000 over ten years, that won't even pay for a roof. But that does not mean that you have to fund all capex out of cash flow long term. Beyond 10 years IMO it is fair to consider equity as a potential source of capex.

Experiment: If you buy a brand new house (close to zero capex needed) and hold it for 30 years, at the time when it needs a major update, you will own it free and clear, so you take out 25% of its then value and rehab it to reset the capex clock to zero.

Brock Mogensen · Answer

There is no exact formula to cap ex.  It can be a very tricky part of the underwriting process, and you are never going to get it exactly right.  The main thing to remember, is you would rather air on the side of having too much cap ex instead of too little.  If it's an older building, you know the roof needs to be replaced in the next few years, etc..bump up your initial reserve deposit and monthly deposits.  If it's a new building, with new mechanicals and a new roof..you can get away with lower monthly deposits.

Tim Herman · Answer

@Nick Schlag for a rough idea you can use a percentage of gross income. For more accurate numbers you do a budget and it depends on the size of the property. My bare minimum for vacancy, capex, and repairs is $250 per month. That means sub $1000 per month rentals need a higher percentage to meet the bare minimum.

Nick Schlag · Answer

Thanks @Tim Herman.  So you dont do % of income if you are analyzing a property? Just in the stages of analyzing deals.

Tim Herman · Answer

@Nick Schlag you use budgets or have cash on hand equal to  1 1/2 times the most expensive capex item. Whenever you use anything out of the budget you suspend taking cash out and replenish the budget.

Nick Schlag · Answer

Do you use % of potential gross income, or effective gross income?

Eric Stugart · Answer

@Kenneth Garrett ok great, thank you so much for your response!

Kenneth Garrett · Answer

@Eric Stugart

Capex is a relative term.  There is no standard calculation to determine the amount.  If you have a new roof for example then the value of the roof would be say $7000/240 (20 years) = $29 a month.  If the roof was 10 years old then it might be $60.  If you put money to the side to cover the major expenses that works to.  Is it enough who knows.  If I budget 5% ($1000 rent) for repairs and have no repairs in 5 years that’s $3000 (theory only) left to apply to capex if necessary.  The idea is to budget for it.  After you accumulate say 10 unit’s and have a 20K savings account for capital improvements is that enough.  Budget is to plan i.e., be prepared for emergencies.  Did you have savings for COVID-19 hopefully you don’t spend all of your cash flow because just like a roof or furnace needing replacement an emergency fund is critical.  Those emergencies need to be done now.  I like the 10% capex rule.  It’s a plan for big expenses.

Eric Stugart · Answer

@Tim Herman That makes so much sense, thanks so much Tim I really appreciate it!

Tim Herman · Answer

@Eric Stugart The $45 capex would be bogus. Sometimes people use a higher repair budget. Repair and capex  go hand and hand. I usually use 5% repair and 10% capex. It's better to have good numbers when you analyse.  There is a spreadsheet in the files section done by @ sam tato that called cap ex that that has most everything listed and their life span. If major renovations are done at the beginning you can use less capex and increase it later. Personally I want to start saving right away.

How to calculate CapEx

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