Estimating Capital Expenditures

9 Replies

I'm new to Bigger Pockets, and recently started playing with the investment calculator. 

Previously, I had used another online calculator which had a "maintenance" field that was pre-populated with an estimate of 10% of monthly rent. There was no field for capital expenditures. On the BP calculator, I see that there is a "capital expenditure" AND a "repairs" field. I guess I hadn't really considered saving for capital expenditures as part of the investment, but while doing some research, I see some people on the forums suggest budgeting as much as 10 percent for repairs, AND 10 percent for capital expenditure.

Obviously that 10 percent has the potential to be a big chunk of potential cash flow. I would love to hear what numbers others are plugging in for these fields. 

Disclaimer: I haven't actually used BP's calculator so if I'm missing something, let me know.

People generally like to use the 50% rule for cap ex. It basically says that 50% of the rent on a property will be used to pay for things like maintenance, property taxes, insurance, ect... That does not include debt service. I've heard other people say they use that same rule but instead of using 50% they use 60%. You're right that really cuts your profits and could take them out entirely.

For example, using the 50% rule if you can rent it out for $1000/month you should put $500 in the bank for cap ex. You may not, and probably won't use it every month, but when a big thing comes up you will have that money there. Say you pay $400/month on debt service. You are cash flowing $100/month. Of course don't forget vacancy rates and account for those. That will depend on your area. I'm just generalizing.

As for your question about the two different fields, I would imagine the repairs field is for repairs you know you have to pay for before you buy the house. Say you know the roof is bad or there's a hole in the wall that you will pay before a tenant is in there.

Hope that helps. It is a bummer.

Got it. Thanks so much for the feedback. I really appreciate it.

So the way I'm figuring it, the 50% from the 50% rule likely breaks down somewhat like this:

10 percent maintenance
10 percent property management
10 percent vacancy
10 percent insurance
10 percent long term repair reserves

It's quite interesting to me to see how many different ways there are to calculate these things. For example, that other calculator bases maintenance costs on a percentage of property value (whereas obviously the 50% rule does it as a function of rent).

I'm also looking in a couple different areas where the tax rates have an insane amount of variation (I'm talking a 10x or more difference). It's making it a bit harder to compare apples to apples. For example, it's super easy to find properties that make the 1% rule in the highly taxed area.... and basically impossible to find properties that do the same in the low tax area.... but when I run the numbers through a calculator the properties start looking very similiar in terms of cashflow potential.

@Matt Gehrls  I think you may be confusing cap ex with regular business expenses. Cap ex (capital expenditures) are big ticket items that you will need to replace, such as a roof, HVAC, etc. This type of expenditure does not include maintenance, property taxes, insurance, etc. However you alluded to that fact later on in your post so I think you knew what you were saying, just using the term in the wrong place.

@Jacob Pritchard  I have found that cap ex should be calculated on a house-by-house basis. People harp on stowing away 10% of monthly gross rents, which generally will cover you. But if you estimate that you need to make a major repair within one year that will cost you $2,400 and your monthly gross rents are $1,000, you should really be putting away 20% into a cap ex fund each month ($200/mo x 12 = $2,400). You can use the general 10% rule, but you may find yourself struggling to come up with money when the time comes to make a big repair.

On the other side of the equation, you may find that you are putting money into a cap ex fund that you haven't used in years because major repairs simply haven't occurred yet.

Got it, @Brandon Hall . There was part of me that suspected that the cap ex would be something that could be figured slightly more on a house-by-house basis compared with other categories of expenses. Thanks for your insight.

Originally posted by @Brandon Hall :

@Matt Gehrls  I think you may be confusing cap ex with regular business expenses. Cap ex (capital expenditures) are big ticket items that you will need to replace, such as a roof, HVAC, etc. This type of expenditure does not include maintenance, property taxes, insurance, etc. However you alluded to that fact later on in your post so I think you knew what you were saying, just using the term in the wrong place.

@Jacob Pritchard  I have found that cap ex should be calculated on a house-by-house basis. People harp on stowing away 10% of monthly gross rents, which generally will cover you. But if you estimate that you need to make a major repair within one year that will cost you $2,400 and your monthly gross rents are $1,000, you should really be putting away 20% into a cap ex fund each month ($200/mo x 12 = $2,400). You can use the general 10% rule, but you may find yourself struggling to come up with money when the time comes to make a big repair.

On the other side of the equation, you may find that you are putting money into a cap ex fund that you haven't used in years because major repairs simply haven't occurred yet.

Brandon, 

What confuses me about the 10% rule of CapEx is the fact that it's a percentage of the gross rent. To be more clear, I'll give you an example. I live in Lancaster, CA, which is a town about 70 miles north of Los Angeles. Both, Los Angeles and Lancaster are located in the LA county. However, since rent in Los Angeles is about twice the rent in Lancaster, according to the 10% rule, I'm supposed to allocate twice as much for my CapEx. This doesn't make sense to me because a roof is a roof, a parking lot is a parking lot, and HVAC is HVAC no matter whether I'm in Los Angeles or in Lancaster. Is it wrong for me to assume that all of these grand expenditures would cost about the same whether I'm in Los Angeles or Lancaster? If this argument makes sense to you, then is the 10% CapEx allocation really a good number to use universally, i.e. for all properties in all the different sates?

Originally posted by @Andrew Karpman :
Originally posted by @Brandon Hall:

@Matt Gehrls  I think you may be confusing cap ex with regular business expenses. Cap ex (capital expenditures) are big ticket items that you will need to replace, such as a roof, HVAC, etc. This type of expenditure does not include maintenance, property taxes, insurance, etc. However you alluded to that fact later on in your post so I think you knew what you were saying, just using the term in the wrong place.

@Jacob Pritchard  I have found that cap ex should be calculated on a house-by-house basis. People harp on stowing away 10% of monthly gross rents, which generally will cover you. But if you estimate that you need to make a major repair within one year that will cost you $2,400 and your monthly gross rents are $1,000, you should really be putting away 20% into a cap ex fund each month ($200/mo x 12 = $2,400). You can use the general 10% rule, but you may find yourself struggling to come up with money when the time comes to make a big repair.

On the other side of the equation, you may find that you are putting money into a cap ex fund that you haven't used in years because major repairs simply haven't occurred yet.

Brandon, 

What confuses me about the 10% rule of CapEx is the fact that it's a percentage of the gross rent. To be more clear, I'll give you an example. I live in Lancaster, CA, which is a town about 70 miles north of Los Angeles. Both, Los Angeles and Lancaster are located in the LA county. However, since rent in Los Angeles is about twice the rent in Lancaster, according to the 10% rule, I'm supposed to allocate twice as much for my CapEx. This doesn't make sense to me because a roof is a roof, a parking lot is a parking lot, and HVAC is HVAC no matter whether I'm in Los Angeles or in Lancaster. Is it wrong for me to assume that all of these grand expenditures would cost about the same whether I'm in Los Angeles or Lancaster? If this argument makes sense to you, then is the 10% CapEx allocation really a good number to use universally, i.e. for all properties in all the different sates?

 That logic makes perfect sense and is exactly my point. A 10% "general rule" for capex expenditures is hogwash. You can use a general rule but may find you've grossly under or overestimated your capex liability. 

Capex needs to be determined on a property-by-property basis. You need to estimated the remaining useful life of each component and build out a capex budget that is indexed to inflation.

Typical expenses

vacancy 5-15%

Repairs 5-15%

Cap ex 5-15% (also based on life expectancy of current items)

Mortgage, insurance, taxes

Then you can decide what your tenant pays from there (utilities, lawn care, snow removal etc.)

Thanks for all the great info!

Hey Guys, Any information on estimating CapEx for Condo's or Town homes? Since the big items on the outside such as Paint, Siding, Roofing are typically taken care of by the HOA, I'd think the CapEx expenditure would be lower. Of course this would be offset by the HOA dues that you have to pay. Any thoughts?

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