New Investors: The Line Item Missing From Most Pro Formas

[William Thompson]

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?

[Abiram Ganesh]

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.