How much to figure in for CapEx for multifamilies?

Question

Hi all,

I'm looking at 6-unit apartments and most in my area are mostly C units built in the 70s and 80s, with some in the 50s and 60s. The outside is brick. Pretty clean. Seems like they stood up well against time. Inside common area is a little rough from wear and tear. The individual units can look nice with a little remodel. My main concern is the plumbing and electrical.

When I'm analyzing the numbers what's an appropriate amount I should set aside for CapEx for these kind of buildings? Also, where do I expect to spend most of the repairs on for buildings of this type and age?

Thank you.

Joel Owens · Answer

Kevin watch out for the lead based paint as it can get expensive to remediate with the current EPA rules in place.

Additionally some places used odd size windows that are no longer available or triple the cost to replace.

The heating and air systems might work but to convert to the new free on standards might be an issue. I looked at a 56 unit one time for a client where the building inspector said the seller had replaced a few systems at 3,500 a piece but the rest he had patched to go a few more years and then would need full replacement. The total cost would have been over 100k to fix that one thing. We passed on the property since the older seller would not give a credit or reduce the price.

Landscaping is another big one. I find sometimes older buildings did not have proper landscape design when they were constructed back then. So you tend to have trees in bad locations or that are too big for where they were planted. This can cause damage to the side of the building, excess water retention, animals jumping on the roof from the tree, trees popping up your sidewalk with the roots and also cracking your foundation in some cases.

50's and 60's come with their own issues as well. The brick might need to be tuck pointed again which is time consuming and you have to make sure the brick has proper weeping drainage when it was installed. Just do not assume because it is solid brick that issues are not present. Just remember it's not just the big items but all the little ones add up to a lot also.

Make sure an scope out lines to the street. If galvanized main that can rust from the inside out and alone can be tens of thousands to replace considering the length of the run and if they have to just dig up dirt or cut out part of the parking lot.

To check the sewer line a plumber typically charges per unit for each toilet they scope out then to the main outward. If you have clean out for outside in the ground it is easier to inspect.

Anthony Chara · Answer

Hi @Lawrence L., yes, you can use it for both, but keep in mind, this is just my absolute minimum. Depending on the condition of the property and condition of the residents (lower cost units usually get beat up faster than higher priced units) you may have to set aside more. I suggest you use the process I gave above as an example and just do the math yourself.

Eg. Have some roofers give you an idea of how long they think the current roof will last and the cost of replacement at that time. Then, divide that amount by months and by units to get a monthly amount to set aside in a separate account at your bank so you don't spend it.

Do this same calculation for things like paint/siding, landscaping, parking lots, walkways, AC units, water heaters, boilers, chillers, signage, etc.

Bryan Hancock · Answer

I would consider looking at the NAAHQ study as a baseline for capex expenditures:

NAAHQ Study

A lot really depends on the building you're purchasing and the state of the major items on the building. Deferred maintenance is very common on buildings. Make sure you're conservative with your estimates when establishing your financial model that will drive your offer.

Nick L. · Answer

You could do the math like @Anthony Chara said. Or a shorthand version where you assume 20 years each for the major mechanicals, then divide the cost of replacing them by 20.

If you don't intend to hold the building for the full replacement term, you could do a probabilistic estimate of replacement as a percentage of rents. Most people estimate between 2.5% and 10% of gross rents. In your case I'd estimate on the high end because (a) older buildings, (b) Class C, (c) 6 units is very small to amortize costs.

Lawrence L. · Answer

@Anthony Chara

How did you come to the figure of $300 per unit for CapEX, and can that figure be used for residential multifamily as well as commercial multifamily.

Anthony Chara · Answer

Most lenders will inspect the property prior to loaning money to you. As part of that process, they will do a Needs Assessment and they'll tell you how much you need to set aside per unit per year for your CapEx. They'll figure out how much longer the roof is likely to last, when you may need to redo the parking lot, paint the building, replace AC units, etc. They'll calculate the total cost, divide that by how many months it will be until replacement time, divide that by the number of units, and have you put that amount into an escrow acct every month just like Taxes and Insurance.

If your lender doesn't do a Needs Assessment or doesn't require you to have a CapEx acct, I would suggest you discipline yourself to set aside at least $300 per unit per year which equates to $25 per month per unit.

Luka Milicevic · Answer

There is what's called a "50% rule" that says all of your non financing cash flow will go towards things like CapEx, utiities, repairs, etc.

That's a good starting point. Older building might take a little more to get them ready!

How much to figure in for CapEx for multifamilies?

How much to figure in for CapEx for multifamilies?

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