What Happens After a Cap Ex Event?

What is a Capital Expense?

Simply stated, for a Real Estate Investor a capital expense is the cost to maintain, repair or replace the larger ticket items in your in your home. Examples of Capital Expense for a Real Estate Investor include but arent limited to replacing (or a large scale repair) of your properties roof, foundation or driveway.

How do I prepare for a Capital Expense?

The best way to prepare for a capital expense is to set aside cash for the expense as it is sure to occur at some point. You can set aside a lump sum of cash for cap ex for each property in your portfolio, but most investors tend to budget for cap ex BEFORE they buy the property as a part of their deal analysis. Capital Expense should be something that you set aside a portion of your monthly rental receipts for every month.

A good rule of thumb is to set aside between 8-10% of your properties monthly rental income. You can also calculate the cost to replace an item and divide it by its useful life to provide you with an estimated cost per month for each cap ex item at your property IE

Item Replacement cost/Useful life=Annual Cap Ex cost

Annual Cap Ex cost/12 (months per year)= Cap ex cost per month

Cap Ex cost per month= Amount you should set aside monthly to be prepared for a Cap Ex Event

How much do I need to save for a Capital Expense?

The answer here is it depends. You may want to reach out to a contractor or an experienced investor in the area for a list of potential pricing for Cap ex so that your estimates are accurate for the area in which you invest. If you ask an investor for pricing estimates keep in mind the age of the info they are providing, meaning, if you ask a person the cost to repair a roof his pricing may be inaccurate if he hasn’t replaced a roof in 10 years or so.

What happens after a Cap Ex Event?

The main reason that you want to prepared for a capital expenditure is the it can kill your Cashflow for a few months or a few years depending on what type of cashflow your property produces. After a capital expense you simply take a deep breath and continue to save for the next possible event. Real Estate Investing is all about long term investing and planning. A Capital Expense maybe a bitter pill to swallow when it occurs, but preparing for the eventual expense makes it more tolerable.

Don’t worry. You’ll get through it.