All Forum Posts by: Matthew Jure

@John Leavelle

It sounds like you decrease your CapEx by being proactive. Good strategy.

@Taylor Thompson

Taylor, I'm curious what you decided to do about CapEx for this 4-plex. I'm running into similar problems in Cleveland Ohio.

Matt

Here is another thread that evaluates a 4 plex. He is running into the same (assumed) over-estimation problems I am. 

One investor said he was using 8% of GSI and didn't have any problems. Short term you would never see a problem. It is the long-term that gets you so I'm curious what a long term investor would say.

@Joseph Taub

I think a 6 month reserve is appropriate and gave solid advice. Maybe it doesn't matter what method I use. The reserve can buffer any mistakes I make and I can adjust based on what I find over time. I'm just finding it hard to do an apples-to-apples comparison of true cash flow and it is driving me nuts. 

Great points. It would depend on how long you hold it. For me I am holding indefinitely. It seems it is open to a lot of opinions on what is included in CapEx and this may be why so many people ignore it.

I've done a lot of investigating and found that if there is one thing that will kill a real estate investor, it is CapEx. CapEx has been dubbed the "Silent Investor Killer" because many investors don't a lot enough to CapEx according to what I can find. There seems to be consensus that you should get hard numbers on CapEx from a reliable source (eg, GC) when inspecting the property but that isn't where the controversy is. The controversy is how to do a preliminary estimate of CapEx in the early stages of evaluating a property.

Upon scouring the internet, podcasts, and picking investor's brains, these are the options to do an early estimate CapEx:

1. Use 5-10% of GSI (however, I've seen as high as 15%)
2. $200-$400/month per door
3. $/month per unit - this is all over the place ($50-$800+)
4. Calculating all CapEx items savings per month
5. $0.67 per square foot/year

My limited criticism for each method:

1. Most common recommendation I find is 5%. But compare California and Cleveland's GSI. GSI's are wildly different but cost to replace an item is similar. However, labor will increase the cost in California - but not proportionally. If you are saving 5% of $1500 GSI, then you only save $900/yr ($9,000 in 10 years). This hardly seems enough.
2. Many save ~$200/mo per door. More reasonable (I think??), but I imagine this doesn't work when comparing a 2 unit vs 10 unit. 
3. Saving per unit seems logical, but it gets a bit foggy when thinking about saving for a single roof, driveway, or other shared expense. 
4. This makes the most sense, but you must be crazy accurate. Depending on how you fudge the numbers you can vary from 25%-50%+! This seems useless unless you have solid numbers. Maybe used after a walk-through with a GC.
5. Using a square footage seems easy enough. If I used $0.67/sq ft on my double with a GSI of $1500, I would save about 8% of my GSI (~$1500).

Depending on which method you use (and the #s you enter), it can change your cash flow enough to make a good deal look bad and vice versa. If CapEx is the Silent Investor Killer, then many investors are underestimating their CapEx.

What are the thoughts of the BP community? 

Why do you feel your method is the best?

What method used in both California and the Midwest (if possible)?

Trello for project management. OneNote for note taking.