CapEx %

14 Replies

I'm doing analysis on a few BH deals around 75-95K on the purchase price. What is a good CapEx % to use on these properties. I have been using 10%, but it seems to be eating into my cashflow.

Does anyone base their CapEx on sq. ft. of occupiable space?

@Kevin Branin - I think 8-10% is safe. You can find deals where using those %s are feasible. What are you using for vacancy, R & M, etc?

I'm using 5 or 8% for vacancy around stone mountain GA...R&M using 5%.  Property Manager, 8%

I'm looking for cash flow on SFR around $200/month on Roofstock

0%.  Don't look at the % numbers.  Have you ever spent a % number on a new roof or HVAC system?  No.  You spend $$ nu,mbers.  With that said, look at the actual $$$ you are pulling out (and ruining your nice cash flow numbers as you've observed).

If you pull out 20% from a rent of 1500/month or 18,000/year, you have saved a whopping the end of the year.  How many HVAC an roofs cost that to replace?...and, you don't get to that point until the end of the year.  What if your roof needs to be replaced in 6 months.  You would only have 1800 to work with.  This concept doesn't work.  It's a false positive, and only produces a false negative on a good deal.

You have to be proactive in this.  Piece mealing it only leads to trouble.  There are much better ways of achieving risk controls to cover CAPX proactively. 

@Joe Villeneuve , what are you suggesting here? Bake in reserves? How does this fit into and impact your rental analysis?

@Joe Villeneuve @Ryan Gerding I think it's pretty reasonable to assume that if the HVAC and roof have just been replaced, you can assume they won't break...if they do they should be covered under warranty.

Also, I'm going to put all cash flow into building the CapEx fund initially, so it will be higher than 10%.

@Kevin Branin - "it depends". If a property is in need of a new roof in <1 years, you should calculate that cost in your offer and your CapEx will be lower (idea that you'll replace the roof soon and you're property won't need a new one for 30+ yrs).

If HVAC is 10+ yrs old, you may have to replace in the next 5-10 yrs, driving CapEx higher.

My CapEx calculations float between 5-7% but it all depends. Happy Analyzing!

@Kevin Branin @Ryan Gerding Taking money out of CF to cove CapEx is a "feel good" move that ruins the analysis of good deals, and doesn't accomplish what it is intended to do.

Take 10% out of a $1000 rent, and you collect $1200 after a year...that's after a full year.  Even if you can go through a year without a vacancy (need to cover tax, insur, mortgage, etc...3 months ~ $1500) or you don't have a major repair (roof $4000, HVAC $2000, etc...) or even a minor one or two (DW $250, etc...), the total yearly retention of $1200 won't put a dent in your costs.

It's not that I don't want to cover it, it's that CapEx retention doesn't work, and all it does is ruin the analysis of a good deal. You need to be proactive:

1 - Get a general business LOC that is in place for this purpose only, and can cover multiple properties should you run into multiple problems.
2 - Get an insurance plan in place to cover the roof, HVAC, etc...  My utility company has an Appliance Repair program, for less than $15 month (that's a lot less than $100), that covers the HVAC/HWH complete.
3 - If the roof, HVAC, etc...looks like it will need repair within the next 5 years, replace it now when you can burry it in your initial costs (financed) and have it under warranty.  Added cost of about $25 on the mortgage...and, negotiate the Offer down to compensate for it.

When I breakdown the monthly cost I always end up between $150/m - $200/m. I am currently reinvesting this budget instead of letting it sit in the worthless bank. I still have reserve money for each property though. I'm using old bond interest for my CapEx budget. In year 5, I will need to start setting aside the CapEx money. But I have 5 years of growth.

Remember also that property analysis is an estimate, at best. A good guess.

@Kevin Branin I think 10% is a solid number, regardless of the impact on your cash-flow. Maybe in an area like San Francisco a roofing cost isn't going to be proportionally higher (compared to rent) than a property in Alabama. However, there are probably different expectations around appliance quality, etc. Now if you have an HVAC system and a roof that are under 2 years old, sure, you can safely duck below 10%. But hoping that your 7 year old HVAC system will last 15 years is probably foolish. It could, I just wouldn't bank on it!

CapEx as a percentage of what??? Rent? What if you're renting the house at $900? Or the exact same house for $1200?
A flat % of rent for CapEx doesn't make sense. The roof costs the same wether you're charging 900 or 1200 for the house.

@ Brandon Turner's book : rental property investing. The general CapEx is estimated as $182/m similar to the estimation from @William S.  , of course, it depends on the property condition suggested by several other members mentioned above.

Originally posted by @Austin Fruechting :

CapEx as a percentage of what??? Rent? What if you're renting the house at $900? Or the exact same house for $1200?
A flat % of rent for CapEx doesn't make sense. The roof costs the same wether you're charging 900 or 1200 for the house.

This is one of the many reasons why this method of covering for CAPEX doesn't work

Agree with @Joe Villeneuve on this. if you want to figure a percentage for CAPEX in your numbers to make you feel comfortable then go ahead, but what if the roof fails after 6 months of owning the place ? you certainly do not have enough from CAPEX to repair it. maybe enough to put a " Temporary tarp" for a few years. your average tear off and replace roof will run you about 300 - $400 per square ( 10' x 10' area ). best not to figure that number and rely on the cash flow without it. personally i keep all the income in the companies checking account ( my goal is to get that to about 10k ) then you can distributions to yourself. the money is there for emergencies. I just bought a place and it ran 14K to redo the roof, but i knew that going into buying it. a new furnace will run you 3-5K. so setting a goal to have reserves is a good plan, but do not figure them in your numbers to make a potentially good deal look bad.

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here