Estimating Capital Expenditures

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Estimating Capital Expenditures

Kevin Luttrell
Lender · Orange County, CA · Member since 2019 · 299 posts · 255 votes

Hello,

I was wondering if some experienced investors out there could provide some quick tips/advice on estimating CapEx when analyzing potential deals. Obviously this is impossible to perfectly predict and I know it can vary significantly by area, property size, condition, etc, but do you have some general guidelines/principles you stick to when doing the up-front analysis? Like a percentage of the rent, or a range depending on the condition of the property?

Any insight would be greatly appreciated. Thanks! 

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  • Brandon Roof
    Rental Property Investor · Member since 2019 · 187 posts · 230 votes
    7y

    Percentage of rent is one that is heavily relied upon, but if you're looking to be concise, you really need to know costs in your area and itemize.  Some costs are relatively fixed and are rarely impacted by the individual home (think appliances), but other things will be very specific to the property such as the roof (size, pitch, material type).  That being said, if you have a relatively narrow focus (i.e. sq. ft. in the 1,000 - 1,500 range, two or three bedrooms, 1 - 2 baths and a kitchen) you can have a pretty good understanding of what standard expenses will be in that setting.  You may occasionally have to deviate if a particular room is over-sized or has a different foundation than what you are used to, but start compiling quotes and historical expenses from similar projects to help you better gauge what a new property may require.

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  • Costin I.
    Rental Property Investor · Round Rock, TX · Member since 2016 · 1k+ posts · 971 votes
    7y

    @Kevin Luttrell - Quick numbers? 8% vacancy, 10% PM, 5% CapEx and 5% Maintenance.

    Here's an BP article that does a great job itemizing CapEx: real-estate-capex-estimate-capital-expenditures

    Just make sure you don't confuse Net Operating Income (which is Gross Rent minus Operating Expenses) with Net Annual Income (which is the annual cash flow and is the NOI minus mortgage expenses and vacancy). And make sure to account for the following expenses:

    1) Mortgage
    2) Mortgage insurance (PMI or MIP) or FHA Risk base
    3) Property Taxes
    4) City Taxes
    5) HOA (Home Owner's Association) Dues and Fees and Assessments
    6) Insurance
    a) Property Hazard Insurance (0.3-0.45%)
    b) Flood Insurance
    c) Earthquake Insurance
    d) Umbrella Insurance
    7) Vacancy Rate (usually 8% - the equivalent to one month a year, or 5-6% if multifamily and/or if experienced, if not use 8%)
    8) Utilities (you’ll have these if your tenant is not covering them and/or during vacancy)
    a) Water § Sewer § Garbage
    b) Electricity
    c) Natural Gas
    d) Propane
    9) General Maintenance (usually 5%)
    a) Upkeep § Landscaping
    b) Snow removal
    c) Repairs
    d) New Appliances
    e) Make ready
    10) Capital Expenditures (usually 5%, higher is the property is old and obsolete, less if fully rehabbed and all mechanicals and roof are new)
    11) Property Management (8%, even if you self manage, your time still has value and there might be a time when you'll want to be completely hands off or you'll not be able to do it, vacation, retirement, etc.), including...
    a) Office Supplies (e.g. stamps, envelopes)
    b) Software
    c) Gas/Mileage
    d) Advertising + Payroll
    e) Concessions
    f) Lease loss
    g) Lease renewal fees
    12) Lawyer/Law office/Legal fees
    13) Accounting/Bookkeeping/CPA/Tax preparer/Tax advisor

    If you want to be precise, maintain a spreadsheet with the mechanicals that calculates exactly how much you need to put aside, per year, per month, when:

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  • Kevin Luttrell
    OP
    Lender · Orange County, CA · Member since 2019 · 299 posts · 255 votes
    7y

    @Costin I. Thank you very much for the detailed response and link to the BP article. Very helpful! 

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