All Forum Posts by: Peter Aziz

Rule of thumb is that if your Cap Rate / Cash on Cash on Cash return (both defined in %) is less than the interest rate on your mortgage, you're going to be in the hole. Keep in mind that there's principal pay down on the mortgage as well. I look for at least a 2 point spread between cap rate and market interest rates.

@Kenneth Garrett, PM me with your email address and I'd be happy to share my worksheet. Still a WIP as I need to finalize my IRR component, but I think it's a good deal analyzer.

@Nathan Gesner, We certainly don't live paycheck to paycheck and my wife and I both make well into the 6 figures each - we can easily write a $10K check to cover incidentals, but this goes against the grain on investing. Each property, in theory, should cover its own expenses along with putting a few bucks in our pocket.

I hope I'm not getting sucked into analysis paralysis, and I certainly don't intend to analyze properties to the penny. The issue I'm facing is that I'm beginning to look at properties in the Midwest with a low acquisition cost and rental stream (relative, of course). Although the returns look decent (also relative), the $ margin is thin per transaction (few hundred bucks a month with no leverage) - the last thing I want is to be wrong in my thesis and have all of my 'free cash flow' eaten up because of CapEx on a 70-90 year old home, you know what I mean?

Historically, my wife and I have invested in SoCal where I could earn 5%-6% COC year 1. Given the rapid rental appreciation, my year 1 5%-6% COC quickly became 10% COC (or more) by years 3 or 4. With a 10%+ return, I could quickly build reserves to weather just about any storm. Since I'm finding it extremely difficult to cash flow at all in SoCal now (using 80% leverage), I'm looking to the Midwest. Different strategy and I just want to make sure my assumptions are accurate so that I don't fall flat on my face (invest in a money pit).

On average, and based on a couple of dozen properties that I've ran through my model, I'm coming up with 25%ish CapEx accrual. That's based on the CapEx assumptions I've outlined above. I understand that CapEx accrual (%wise) is going to be wildly different from region to region, and that's why I want to make sure I understand what I'm getting into before pulling the trigger.

@Josue Vargas, apologies, I missed the part above where you noted that you normally accrue CapEx at 7% of gross rent for new homes, and at 10%-12% for older homes. I'm assuming that you're not investing in homes that fetch $1K - $1.2K/mo in rent. I assume so because at a 10% CapEx accrual for a home that rents for $1K/mo, you're only setting aside $100/mo. Seems like it would take an awfully long time to accrue enough for a roof alone (5-6 years), and we still haven't even discussed other items such as paint, appliances, etc.

@Josue Vargas, out of curiosity, what regions are you investing in and what do you assume for CapEx as a % of rent? Based on the assumptions that I've made, I'm coming up with an average CapEx accrual of 25% of gross rents (before vacancy factor). That average is based on about 20 homes that I ran through my model selling in the $80K - $110K range with rents ranging from $700 - $1200.


Agree that it's easy to get sucked into analysis paralysis, and I certainly don't intend to analyze properties to the penny. The issue I'm facing is that I'm beginning to look at properties in the Midwest with a low acquisition cost and rental stream (relative, of course). Although the returns look decent (also relative), the $ margin is thin per transaction (few hundred bucks a month with no leverage) - the last thing I want is to be wrong in my thesis and have all of my 'free cash flow' eaten up because of CapEx on a 70-90 year old home, you know what I mean?

Historically, I've invested in SoCal where I could earn 5%-6% COC year 1. Given the rapid rental appreciation, my year 1 5%-6% COC quickly became 10% COC (or more) by years 3 or 4. With a 10%+ return, I could quickly build reserves to weather just about any storm. Since I'm finding it extremely difficult to cash flow at all in SoCal now (using 80% leverage), I'm looking to the Midwest. Different strategy and I just want to make sure my assumptions are accurate so that I don't fall flat on my face.

Thanks for the input, @Josue Vargas. You are correct in the sense that a portion of a component's useful life will have already been 'eaten up' at acquisition; However, as I noted in my post, my spreadsheet takes into account the average age of each component I outlined in my CapEx schedule and then accelerates the CapEx accrual up front dependent on said component age. So, yes, for all intents and purposes, the assumption for this discussion's purposes is that all components are new.

I disagree that one should use a % of rents for CapEx accrual. The cost to replace a water heater is a fixed expense, irrespective of whether your unit demands $4K in monthly rent or $1K. Most CapEx are based on a fixed cost, with the exception of certain items that are dependent on property size (roof, floors, etc).

One other question - as a landlord, what do you do when it snows? Are your tenants responsible for clearing snow from their driveways? Are there instances where you need to pay for snow removal?

@Shera Gregory, love it! We have an almost identical approach!

Appreciate the responses, folks. @Shera Gregory, my spreadsheet takes into account the average age of each component I outlined in my CapEx schedule. I then accelerate my CapEx accrual up front dependent on component age (i.e., if a roof has a useful life of 20 years, but I can reasonably determine that the roof on acquired property is 10 years old, I double my accrual to ensure I have enough reserves to replace the roof in 10 years instead of 20). My offer is then based on my required return with a weighted average CapEx accrual (assuming an x year hold period).

It's not a perfect science, which kills me since I'm a numbers geek :)

Would you folks agree with my useful life assumptions in the MW?

Good morning BP Family! I hope everybody has had an amazing week and is looking forward to an even better weekend! I'm still on the hunt for a new acquisition and am looking for SFRs or multi units in the Indy area (but am open to other Midwest geographies). As I hone in on my numbers, I'm trying to figure out what I should be accruing for my fixed expenses (read, CapEx and Maintenance accruals). Here's what I'm coming up with so far for CapEx, irrespective of property type/class:

• Roof - 1,000 sq ft; replacement cost per sq. ft. $7 ($7,000 total); Useful life 20 years (240 months) = monthly roof CapEx accrual ($7000/240) = (a) $29.17
• Water Heater - replacement cost of $1,000; Useful life 10 years (120 months) = monthly water heater CapEx accrual ($1000/120) = (b) $8.33
• Kitchen Appliances - replacement cost of $1,000; Useful life 10 years (120 months) = monthly kitchen appliances CapEx accrual ($1000/120) = (c) $8.33
• Driveway/Parking Lot - replacement cost $5,000; Useful life 50 years (600 months) = monthly driveway/parking lot CapEx ($5,000/600) = (d) $8.33
• HVAC - replacement cost $3,000; Useful life 10 years (120 months) = monthly HVAC CapEx ($3000/120) = (e) $25
• Flooring - replacement cost $2,000; Useful life 5 years (60 months) = monthly flooring CapEx ($2,000/60) = (f) $33.33
• Plumbing - replacement cost $3,000; useful life 30 years (360 months) = monthly plumbing CapEx ($3,000/360) = (g) $8.33
• Windows - replacement cost $5,000; useful life 30 years (360 months) = monthly windows CapEx ($5,000/360) = (h) $13.89
• Paint - replacement cost $2,500; useful life 5 years (60 months) = monthly paint CapEx ($2,500/60) = (i) $41.67
• Cabinets/Counters - replacement cost $3,000; useful life 20 years (240 months) = monthly cabinets/counters CapEx ($3,000/240) = (j) $12.50
• Structure (foundation/framing) - replacement cost $10,000; useful life 50 years (600 months) = monthly structure CapEx ($10,000/600) = (k) $16.67
• Components (garage door, etc) - replacement cost $1,000; useful life 10 years (120 months) = monthly component CapEx ($1,000/120) = (l) $8.33
• Landscaping - replacement cost $1,000useful life 10 years (120 months) = monthly landscaping CapEx ($1,000/120) = (m) $8.33

Sum of (a) through (m) = apx $214/mo for my CapEx accrual - Does my approach make sense and does it seem reasonable?

Aside from CapEx, I'm also trying to determine my monthly maintenance expense. I'm coming up with a monthly gardener expense of $30 and a (TBD) expense for snow removal. Since my entire current rental portfolio is in SoCal, I don't have any experience with snow removal (or the expenses associated with it). Do you Indy/MidWest landlords budget for snow removal expense?

For PM, I'm budgeting 12.5% of gross collected rents (10% standard fee for gross collected rents plus another 2.5% ancillary expense for turnover/lease prep/inspection fees, etc).

For vacancy I'm conservatively budgeting 10%

Based on the above assumptions, I'm modeling out potential investments. For whatever it's worth, I'm primarily looking in B+ to B- areas, which may result in favorable occupancy relative to my 10% vacancy factor. Can anybody opine on my assumptions relative to their actual real world experience - I'm primarily at a standstill when it comes to my CapEx accruals. Are my assumptions reasonable?

I really appreciate the help. I hate asking for help without providing some sort of value in return, so I'm happy to share my excel model that I'm using to analyze properties in exchange if any of you find that useful. Again, thanks for taking the time!

Good morning BP Family! I hope everybody has had an amazing week and is looking forward to an even better weekend! I'm still on the hunt for a new acquisition and am looking for SFRs or multi units in the Indy area (but am open to other Midwest geographies). As I hone in on my numbers, I'm trying to figure out what I should be accruing for my fixed expenses (read, CapEx and Maintenance accruals). Here's what I'm coming up with so far for CapEx, irrespective of property type/class:

• Roof - 1,000 sq ft; replacement cost per sq. ft. $7 ($7,000 total); Useful life 20 years (240 months) = monthly roof CapEx accrual ($7000/240) = (a) $29.17
• Water Heater - replacement cost of $1,000; Useful life 10 years (120 months) = monthly water heater CapEx accrual ($1000/120) = (b) $8.33
• Kitchen Appliances - replacement cost of $1,000; Useful life 10 years (120 months) = monthly kitchen appliances CapEx accrual ($1000/120) = (c) $8.33
• Driveway/Parking Lot - replacement cost $5,000; Useful life 50 years (600 months) = monthly driveway/parking lot CapEx ($5,000/600) = (d) $8.33
• HVAC - replacement cost $3,000; Useful life 10 years (120 months) = monthly HVAC CapEx ($3000/120) = (e) $25
• Flooring - replacement cost $2,000; Useful life 5 years (60 months) = monthly flooring CapEx ($2,000/60) = (f) $33.33
• Plumbing - replacement cost $3,000; useful life 30 years (360 months) = monthly plumbing CapEx ($3,000/360) = (g) $8.33
• Windows - replacement cost $5,000; useful life 30 years (360 months) = monthly windows CapEx ($5,000/360) = (h) $13.89
• Paint - replacement cost $2,500; useful life 5 years (60 months) = monthly paint CapEx ($2,500/60) = (i) $41.67
• Cabinets/Counters - replacement cost $3,000; useful life 20 years (240 months) = monthly cabinets/counters CapEx ($3,000/240) = (j) $12.50
• Structure (foundation/framing) - replacement cost $10,000; useful life 50 years (600 months) = monthly structure CapEx ($10,000/600) = (k) $16.67
• Components (garage door, etc) - replacement cost $1,000; useful life 10 years (120 months) = monthly component CapEx ($1,000/120) = (l) $8.33
• Landscaping - replacement cost $1,000useful life 10 years (120 months) = monthly landscaping CapEx ($1,000/120) = (m) $8.33

Sum of (a) through (m) = apx $214/mo for my CapEx accrual - Does my approach make sense and does it seem reasonable?

Aside from CapEx, I'm also trying to determine my monthly maintenance expense. I'm coming up with a monthly gardener expense of $30 and a (TBD) expense for snow removal. Since my entire current rental portfolio is in SoCal, I don't have any experience with snow removal (or the expenses associated with it). Do you Indy/MidWest landlords budget for snow removal expense?

For PM, I'm budgeting 12.5% of gross collected rents (10% standard fee for gross collected rents plus another 2.5% ancillary expense for turnover/lease prep/inspection fees, etc).

For vacancy I'm conservatively budgeting 10%

Based on the above assumptions, I'm modeling out potential investments. For whatever it's worth, I'm primarily looking in B+ to B- areas, which may result in favorable occupancy relative to my 10% vacancy factor. Can anybody opine on my assumptions relative to their actual real world experience - I'm primarily at a standstill when it comes to my CapEx accruals. Are my assumptions reasonable?

I really appreciate the help. I hate asking for help without providing some sort of value in return, so I'm happy to share my excel model that I'm using to analyze properties in exchange if any of you find that useful. Again, thanks for taking the time!