Real Estate Deal Analysis & Advice

How to Estimate Future CapEx Expenses on a Rental Property

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Let's talk about my "Hell House"—the property that taught me the importance of CapEx in real estate. I bought the home for an incredibly cheap price: just $40,000. What a steal, right? I put another $40,000 into fixing it up and then refinanced, following the BRRRR strategy (buy, rehab, rent, refinance, repeat).

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It was all downhill from there. I thought I was going to make a decent monthly profit on the property, but the truth is that I don’t. In fact, I lose money every single year.

Every. Single. Year.

Why?

CapEx—or capital expenditures.

Here’s how to avoid your own Hell House.

What Are Capital Expenditures?

Analyzing properties correctly is important. Without doing the right math before investing, you’ll never get the right profit.

Most of us can estimate simple expenses like repairs, vacancy, and property management fees. But those aren't the only operating expenses—and nearly every new investor struggles with capital expenditures, or CapEx. What is CapEx? It's those expensive "big ticket" items that need to be replaced every so often, but not every month or year. This could include roofs, appliances, driveways, or plumbing systems.

CapEx is the reason I lose money every year on my Hell House. Over the past year, I made about $1,000 in cash flow. But last week I got a call from my property manager letting me know the bathroom flooring needed to be redone. Total cost of this expense? $1,200.

Another year of losing money on the Hell House.

Another way to think of CapEx: If you earned $100 per month in cash flow for 10 years, making $12,000 total, and then reroof the property—costing you $12,000—what did you really accomplish? Hopefully, the value increased during that time, but that's an appreciation game I don't really play. For a smart BRRRR and buy and hold investing strategy, you want to make sure the property actually produces cash flow.

How to Estimate CapEx

Like repairs, CapEx is difficult to estimate. It depends on a lot of different factors, such as the property’s condition, age, and type. Your investment property might be a 3,000-square-foot single family house built in 2005. Mine might be a 1920 five-plex that hasn’t been updated in thirty years. Is the CapEx going to be the same? Of course not!

While there is no single “CapEx” number you should stick to, you can sit down and estimate how many years a roof or an appliance will last. What is the condition of your plumbing? What will a new driveway cost? Divide the estimated cost by the number of years the system has left.

To do this, start by listing every “big ticket” item that might need to be replaced in the next 20 years. Use the following chart to get started, but understand that your area might have different expenses.

The following chart lists 13 of the major capital expenditures that a typical property has, then looks at the total replacement cost for that item and its useful life. This tells us how much per year we should be saving to replace that item. We can then break that figure down into a monthly price.

Capital Expense Replacement Cost Lifespan (years) Cost per Year Cost per Month
Roof $5,000 25 $200 $16.67
Water Heater $600 10 $60 $5.00
All Appliances $1,000 10 $100 $8.33
Driveway/Parking Lot $5,000 50 $100 $8.33
HVAC $3,000 20 $150 $12.50
Flooring $2,000 6 $333 $27.75
Plumbing $3,000 30 $100 $8.33
Windows $5,000 50 $100 $8.33
Paint $2,500 5 $500 $41.67
Cabinets/Counters $3,000 20 $150 $12.50
Structure (foundation, framing) $10,000 50 $200 $16.67
Components (garage door, etc.) $1,000 10 $100 $8.33
Landscaping $1,000 10 $100 $8.33
TOTAL $41,100 $2,193 $182.75

According to this chart, we should be setting aside $182.75 per month for CapEx for this single-family property.

The Problem with Estimating CapEx

However, there are limitations to estimating capital expenditures this way for real estate investors.

This chart assumes that everything was brand new when the property was purchased—but as any landlord knows, things don't break down evenly. Your plumbing may only have a few years left. Or perhaps the paint is peeling, and the appliances are already 30 years old.

The average of $182.75 might be true on this example property over the long run, but what about immediate concerns? Let’s say you start saving today… and then are hit with a $5,000 roof replacement bill next year. Then, you wouldn’t have enough cash set aside to cover that new roof.

Therefore, it’s important to take an inventory of what will need to be replaced sooner rather than later and save extra just for those items. And this is also an important argument for why cash reserves are so important. Things don’t break down evenly.

Finally, keep in mind: The $182.75 in this chart is just an example for one fictional property. Each item may cost more or less for you. And you may have expenditures that I didn’t list. The point of this chart is to merely show how to calculate CapEx for a property.

I would recommend that you sit down with an Excel spreadsheet and determine what CapEx in your area looks like. Over time you’ll come up with a general ballpark number that you can use for “most deals” in your area. For example, when I’m using the BiggerPockets Rental Property Calculator, I typically assume about $200 per month for CapEx for single-family homes and about eight percent of the gross rent for multifamily properties.

How CapEx Can Make a $40,000 House a Bad Deal

Notice that the chart we presented wouldn’t change much for a $400,000 property versus a $40,000 property. Sure, you might need to replace more windows or a bigger roof, but that won’t hugely affect your calculations. In other words, just because with a $400,000 purchase price is 10 times more expensive than one that is $40,000 doesn’t mean its roof, windows, or paint will also be ten times more expensive.

CapEx is a much greater percentage of the income when dealing with lower-priced properties. On a home that rents for $2,000 per month, the CapEx of $200 per month is 10 percent of the income. On a home that rents for $600 per month, that $200-per-month CapEx makes up a whopping 30 percent of the rent.

So all those $15,000 houses for sale in the Midwest might seem like a screaming deal, but be sure to run the numbers and make sure it pencils out after CapEx.

After all, you don’t want to end up with a Hell House like mine.

Do you take CapEx into account for every single property you purchase? Have capital expenses ever burned you?

Let me know with a comment!

Brandon Turner is an active real estate investor, entrepreneur, writer, and co-host of the BiggerPockets Podcast. He is a nationally recognized leader in the real estate education space and has tau...
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    Andrew
    Replied almost 4 years ago
    I see these charts that essentially mirror my own spreadsheets and the only conclusion one can draw from this is that now, at the end of 2016, there are no more investment properties left on the market that even remotely resemble the returns demonstrated. Unless you’re attracted by a 0% (or more likely, negative) cash on cash return, there’s nothing really you can buy right now.
    William S. Rental Property Investor from Overland Park, KS
    Replied almost 4 years ago
    Many deals I’ve analyzed leave me with only $100/m after plugging in roughly $150/m for CapEx… I also use $1,000/yr in repairs too. Maybe I’m going overboard with my estimations?
    Peter Mateja from San Jose, California
    Replied over 3 years ago
    I just went through this exercise in order to analyze potential CapEx for turnkeys, with the following adjustments: – I’m considering a max holding period for the rental, e.g. 10 or 15 years. I’d expect to sell sometime between breakeven and this max period, depending on market conditions. – If any of the items above will likely need replacing within this holding period, then I weight it at 1.0. If not, e.g. maybe the roof was new on purchase, then I instead weight it on an exponential scale as a simple approximation of probability of this being an issue. e.g. if I’m expecting to hold for 10 years, and that the roof has 20 years to go, then my roof weighting would be 10^2/20^2 = .25. This is a simple form of risk weighting, i.e. I’m probably not going to have to replace the roof, I’m building in some additional cap ex reserves just in case… it’ll suck if I do have to replace, but at least I’ve set aside some money for it, and then I can dip into my pooled reserves for the remainder. – I then inflation adjust the item cost and apply the weighting factor to come up with an expected cap ex expense. This still is just a model, but what this allows me to play with is seeing how my expected holding periods might change the capex factor used against gross rents. Oh, and for those curious, the turnkeys I’m evaluating went from an advertised 14.2% CoC in year 1 to my projected 3%. By year 10, I’ve got a calculated 4.7% CoC return, with a total annualized exit return of 11%. Definitely shows the stark difference between advertised returns on TK vs a more conservative approach.
    Jeremy Karja Rental Property Investor from Elk River, MN
    Replied about 3 years ago
    Fantastic Brandon! This helps a ton. Cap Ex can be an elusive thing. Thank you!
    Marc V Palmeri Rental Property Investor from Boston, MA
    Replied about 3 years ago
    Great post! I was factoring in 5% of gross rental income as my cap ex reserve. That is a pretty close approximation to the figures I’m getting using your chart (and would account for inflation as well), but the level of detail when breaking it down by each item is better. I’m a big fan of added granularity, especially when it comes to something as abstract as estimating cap ex. Now I can run scenario analyses on what the total cap ex figures might be by estimating the age/remaining useful life of individual items. Thanks Brandon.
    James Coates from Little Rock, Arkansas
    Replied almost 3 years ago
    Maybe my math is wrong but are we sure that the total is 41k? I got $42,100 total replacement costs of all big ticket items.
    Ryan Y. from Boise, Id
    Replied almost 2 years ago
    Thank you Brandon! This is great information and presented in a format that is easy to understand. Also very helpful in conjunction with the BRRRR calculator.
    Dai Hai Ngo Rental Property Investor from Irvine, CA
    Replied over 1 year ago
    Thank you, Brandon ! What a useful post, esp. for new investors.
    Rosa Esquivel New to Real Estate from El Cerrito, CA
    Replied over 1 year ago
    Thank you. This helps my analysis. I had no idea what to plug into the calculator before.
    Kevin G. Rental Property Investor from West Hills, CA
    Replied 10 months ago
    Wow. This changes a lot now. Now I know why we have to look at hundreds of properties before one will make sense. I was leaving the CapEx blank for the last 100 properties. Now adding $182 per month to the mix really eats into the cash flow and ROI analysis. Good deals are now even more far and few between eh? Thank you for helping me avoid a costly mistake.
    Kenan Heppe Rental Property Investor from LA/Portland/Beijing
    Replied 8 months ago
    This is such an awesome post, and is a godsend to me as I'm just learning to do full-fledged, proper due diligence and investment analysis. Thank you so much!
    Yuval Molcho Rental Property Investor from Tel Aviv Yafo
    Replied 5 months ago
    Thank you, Brandon! This is so helpful for analyzing a deal for new investors like me! I loved the simplicity of your explanations, and although I understand all numbers are estimations, it's now easy to understand how to approach CapEx when looking at a deal. For me it really emphasized the importance of checking each major system individually when considering buying a property, and even checking for receipts received from the last replacement, talking to the manufacturer or contractor working in the neighborhood, and asking for typical prices of replacements. Thanks! Yuval
    Roger Haney
    Replied 2 months ago
    Thanks for the breakdown, Brandon. I really appreciate you giving back the knowledge to help us newbies!
    Sharon Beatty
    Replied about 1 month ago
    Thank you for the info. I'm just starting to analyze properties so that I'm comfortable running the numbers when we're ready to buy. I had a question about how to estimate capital expenditures and the answer was right here on this site!