What do you estimate for capex and how do you pay for it?
I should start by saying that I am mostly looking at cash flow markets like Kansas City (KC), Ohio (OH) and Indianapolis (IN) and not higher priced markets like CA or NYC, so what I say depends heavily on that fact.
One of the biggest issues I have run into in trying to buy properties is how much to estimate for capital expenditures. I started by using the percent of rent method I have seen on many forum posts and checking my numbers against the 50% rule. The problem I see is that this starts to fall apart on lower priced homes once I start actually running real numbers for capex. A good example of these is explained in this article:
http://www.biggerpockets.com/renewsblog/2015/03/03/why-you-cant-make-money-on-30000-houses/
I have also seen and tend to agree with slightly smaller numbers I have heard from those with more experience than I of about $100 - $175 (slightly less than the article above).
However, considering that few properties meet these requirements on a rental basis alone I am wondering how most people that have long term buy and hold track records account for this major item? Do you just assume that appreciation will bail you out? What about other forms of equity such as debt pay down or equity value at purchase strategies? From the numbers I see it looks like doing this lets you clip the coupon over time at a very good rate. It’s a little risky if you get overextend but seems to work at least in theory if you can manage the leverage risks.
Just curious what others think of this thought process and what has been the experience from those with long hold times as I am looking at different strategies and am unsure which to choose.