CaPex Budgeting Costs

[Jamall Lynch]

Top of the afternoon BP family,

I'm a newbie who recently came across a formula on how to budget for CAPEX. It says that I should take the cost of the repair and divide it by how many years it will last and divide that number by 12 months to get the dollar amount that I should be tucking away every month for that expense.
For Example: Let’s say it’s a $20,000 roof that will last 10 years. 

20000 ÷ 10 ÷ 12 = 166

This formula states that I should be setting aside $166 per month for this expense. 

I've also heard a few investors say that it's a good rule of thumb to set aside 10% of my gross income every month for CAPEX. Which metric is best to use when accounting for CAPEX? And what are some additional CAPEX items that I should be factoring in besides the roof and HVAC? I'd greatly appreciate your input.

   

[Bill B.]

Percent of rent is USELESS…

If your 2000sf home needs a new roof, the roofer doesn’t care if you’re collecting $800/mo in Detroit or $5,000/mo in California. The California roof isn’t 6x more expensive. (Though maybe twice so maybe a bad example.)

But if you buy an identical house 10 miles out of primary city for 20% less and charge 20% less rent. The roof isn’t 20% cheaper than the house 10 miles away. 

Once I got beyond 5 properties I personally stopped budgeting for capex. A our most expensive items were AC units (I have yet to spend a single dollar on our tile roofs.) and they could be paid out of the current months rent.

If you do wish to budget for them, including saving in a seperate account. I would list every single item your counting as capex, their useful remaining life and their cost that day. Start saving the percents you mentioned above. Then on Jan 1st (or any other random day.) of each year go back to the list. Do the calculation again. Replacement cost (that day as opposed to last year.), minus amount saved so far, divided by remaining life. Some amounts may go up or down and some may disappear if you have already saved enough for that item and it’s in extra innings.