Using a % of rent to calculate CapEx seems wrong to me

[Paul Bowers]

I'm brand new at this but it seems that using a percentage of the rent to set aside for CapEx doesn't seem to make sense. Let's assume I buy two different 1,500 square foot houses and one rents for $2,000 per month and the other rents for $800 per month. A furnace, a roof, water heater, etc will cost the same in either house but I've accounted for 2.5 times the money for one property over the other. Is there a better way to look at this?

[Llewelyn A.]

@Paul Bowers

I agree 100% with you. That's not accurate, especially if you have higher rental properties like I do in Brooklyn, NY.

What I do estimate all the costs of all the CapEx I will have in 10 years, such as replacing the roof, etc. Add them all up, and then divide by 10 to get a per year estimate. I then divide by 12 to get a monthly estimate.

A lot of times, when you purchase your investment, you will get a detailed inspection which will give you things like what will be replaced when and for how much, etc.

If you go through it, maybe add some of the things you believe should be put into it, then it will be easy for you to arrive at an accurate number.

I tend to over estimate the CapEx over the 10 year period so I can save a little more money just in case there is a surprise, which comes up now and then such as a foundation leak.

Using 10% of rent roll will cause the NOI of a potential good investment, in most cases, cause you to over look it.

While my method is more labor intensive, it is FAR more accurate that just arbitrarily picking a number out of a hat using it without any thought as to it's accuracy.

But that's my opinion as a RE Investor in an expensive rental market like Brooklyn over 2 decades. Others may have had a vastly different experience, but I'd like to hear about that as well.