New Investors: The Line Item Missing From Most Pro Formas

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New Investors: The Line Item Missing From Most Pro Formas

William ThompsonBusiness Member
Accountant · Williamstown, NJ · Member since 2025 · 320 posts · 177 votes

I see a lot of new investors run pro formas to make sure a deal “pencils.”

That’s great — but there’s one line item that gets skipped more than any other

CapEx.

CapEx is money set aside for capital expenditures — the big-ticket items that wear out over time:

  • Roofs
  • HVAC systems
  • Major appliances
  • Plumbing or electrical updates

These costs don’t show up every month, which is why they’re easy to ignore.
But when they hit, they hit hard.

A deal can look great on paper and still fall apart if CapEx isn't built in from the start.

If you want to know whether a deal actually works — not just today, but long-term — CapEx has to be part of the math.

For those starting out: do you include CapEx in your pro formas, or is it something you're still figuring out?

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Abiram Ganesh
Member since 2023 · 8 posts · 8 votes
7mo

Completely agree with this advice. In my pro forma, I typically pencil in ~4–8% for CAPEX, and once a property is stabilized, I set up automatic transfers to a dedicated CAPEX reserve account so saving for larger, unexpected expenses is fully automated.

In addition to CAPEX, I also underwrite ~5–12% for vacancy (to account not just for empty months but turns and lease-up friction) and ~4–8% for operating expenses. It's been a helpful way to stay conservative on paper while avoiding surprises in real life.

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  • William WhitleyBusiness Member
    Accountant · TN · Member since 2025 · 144 posts · 91 votes
    7mo

    This is sound advice. You have to set aside money to replace big ticket items, though small ticket items can accumulate quickly into a significant amount of money if they happen all at once.

    In real estate investment bookkeeping, we actually call it 'Reserves for Replacement' while you're saving that money. It technically only becomes CapEx once you actually spend it on the improvement.

    But terminology aside, your point is the most important part. If you aren't setting that cash aside every month, a 'surprise' roof or HVAC repair will eventually wipe out all those perceived gains. Great advice for new investors to understand!

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  • Abiram Ganesh
    Member since 2023 · 8 posts · 8 votes
    7mo

    Completely agree with this advice. In my pro forma, I typically pencil in ~4–8% for CAPEX, and once a property is stabilized, I set up automatic transfers to a dedicated CAPEX reserve account so saving for larger, unexpected expenses is fully automated.

    In addition to CAPEX, I also underwrite ~5–12% for vacancy (to account not just for empty months but turns and lease-up friction) and ~4–8% for operating expenses. It's been a helpful way to stay conservative on paper while avoiding surprises in real life.

    2Reply
  • Stuart UdisPro Member
    Attorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votes
    7mo

    It’s even worse than people underestimating capex. There’s a huge group of investors chasing the cheapest single family homes they can find. At that price point, the properties simply cannot absorb the cost of proper system upgrades like roofing, HVAC, plumbing, or electrical. So what happens is investors end up deferring repairs and spending on temporary fixes without addressing the failing systems. It's an issue in that segment of the market that doesn’t get talked about nearly enough.

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  • Corby GoadeBusiness Member
    Investor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes
    7mo

    Great advice for sure. I work with tons of new investors as an agent and when we are putting together a proforma, it's pretty easy to estimate the cost of most capex items and approximately when they'll hit. The problem I see more often than not, is that new investors looking for the highest cash flow they can get, will take on a property in disrepair because it cash flows $300 per month, but they don't negotiate for repairs on those items during due diligence and take ownership with no capital and start saving for capex at $100 per month (don't want to mess with that cashflow, right??). 

    In those scenarios, you need to aggressively save for capex up front and have a buffer, because they'll be much more painful when you need a roof the sixth month you own the place, which is worth $100K and the roof costs $10K. 

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  • Kenneth GarrettPro Member
    Investor · Florida Panhandle/Illinois · Member since 2016 · 4k+ posts · 3k+ votes
    7mo

    Capex is important, but if you go too high, the deals won't pencil out. This is why I'm a big proponent of the BRRRR strategy. When you correct those big ticket items you can have a low CAPEX. You can also have a low maintenance/repair number. I don't think it's one answer as with many things it depends.

    5% is probably to high for a fully updated property taking into consideration the major components. I take each component evaluate its life span and calculate what its useful life is left.

    In general, I keep $20K for the unexpected things that can arise and CAPEX a small percentage of rent on top of that. Now this varies depending on the number of properties you have. For a portfolio of ten or less it's probably enough. As you grow you will want to increase that amount. We all need to be prepared those big ticket items.

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