Factoring in Repair Costs when Analyzing Multifamily Deals
Hello Everyone-
I am a new multifamily property investor and I am currently analyzing listings in the Tucson, AZ & San Diego, CA area with the hopes of closing on my first property in Q1 of 2018. I'd appreciate advice from the BP Multifamily investor world on how to make accurate and conservative estimates on how much $$ I should expect to allocate towards capex/repairs.
If you have some rules of thumb and general guidance to go by, that would help!
Thank you!
First off this is a pretty hard question to answer. From what I have read an average minimum would be 5% capex and 5% maintanence. Just to be clear capex is large repairs like a replacing a roof/painting the building/unit remodels etc. Maintenance is replacing a water heater/range unit/light turn over. The figures you use are really dependent on the age and condition of the property. Where I am, a 1980s property is considered old and will require more maintenance and capex set aside. I would use 10% each. A lot of other properties in my area were built 1990-2010 and the building construction is much better in terms of materials(copper/pvc pipe vs steel, ect) and I would use 5%. It is really case by case and your best estimate on the life left on the components of the building. Enviorment has a huge factor on that. San Diego has much more moisture exposure than Phoenix, but Phoenix has more sun exposure. Both enviromental conditions affect the buildings exteriors differently. Water bills in San Diego are higher than other cities.
This is just my take on your question.
Ike,
First of all welcome to BP. You will find a wealth of information and help here.
To answer your question directly, repairs and CAPEX are separate things. It is not possible to estimate repairs without knowing more about the property and to estimate it reasonably, you (or your contractor) need to walk it. Once you do this a few times, you get fairly accurate. Many people use 10% for CAPEX but that really only scratches the surface.
Repairs are things that you intend to do immediately. CAPEX are amounts that you will be setting aside to cover various items that you expect to replace over time (your expected hold period). Also, Repairs and CAPEX to a large degree is independent of rents collected or purchase price.
On the repair side, the cost of painting a 2 BD apartment will be roughly the same regardless of rent collected and how much you paid for the unit.
On the CAPEX side, if you do the roof after you purchase the property and intend to only hold for 10 years, you are unlikely to need to do the roof again during the period and it will cost you about the same regardless of if it is a high end property or dump.
Good luck,
ORen
You’re really going to need to model all repairs before you buy. Think about the sf of each unit you will renovate, what you’re going to do, and what the cost is. Also you need true costs for exterior repairs like painting and roofs, a percentage won’t work. I paid for a spreadsheet from Michael Blank of on modeling all this stuff. His is really for very large MF, smaller MF that you’re just buying for yourself is different. PM me and I’ll send you a modified spreadsheet I made.
@Ike Ekeh I agree this is a tough question to address and you'll get varying answers. I'm copying @Justin R. and @Dan Heuschele as I've found their information very helpful. If anything else, make sure to be conservative on your numbers, know the market for what you can realistically get in rents and don't force the numbers to make the deal look appealing. Feel free to reach to me and best of luck!
I agree with @Oren K. that maintenance/cap expense is not primarily a function of the rent amount or purchase price but more a function of things like number of bathrooms, quality of interior, square footage, attached vs detached, type of exterior (siding), unit requires HVAC vs just furnace, etc.
@Justin R. and I recently discussed cap expense versus maintenance. I think his view is cap expense are items to be depreciated. It does provide a clean definition. Justin is very good at having well defined terminology.
I group cap expense and maintenance estimates because I realize that it is hard enough to forecast one estimate or the other estimate. Combining them means I only need to try to forecast a single number. The actual expense will dictate if the item needs to be depreciated.
Justin and I each recently posted our expense estimates on recent purchases on a different thread (something like is anyone cash flowing on San Diego rental properties). We both by happenstance posted on a duplex with 3/1 and 2/1 configuration. My combined maintenance/cap expense number was very close to Justin’s separated estimates (cap expense, maintenance, yard maintenance) . My maintenance/cap expense estimate on this duplex was $275 (3/1/1) and $250 (2/1/1) for a total of $525. For comparison the rent is $3200/month and purchase was $442k. Note in areas with cheaper rents the cap expense/maintenance cost versus the rent would be worse.
On a related subject... Last week we experienced our third slab leak in the last 4 years. It appears the plumber failed to fix the issue on his first try (~3 man days of labor). Concrete Slabs from the 1960s and 1970s are approaching end of life on the copper plumbing. Bypass the leak does nothing to make the remaining slab plumbing any newer. Consider whether the entire unit should be replumbed. I forecast what I believe are realistic cap expense/maintenance estimates. When expenses like slab leaks occur I take solace in knowing that I have allocated for these expenditures.
Good luck
@Ike Ekeh All good info. Rule of thumb is Repairs and Maintenance is at least 10% of Gross income - more if you see it needs it and CapEx $150 per unit. Again, depends on like everyone as already stated above. But that should help to start your number running.
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