Realtor · Los Angeles, CA · Member since 2018 · 952 posts · 1k+ votes
Hi gang,
I'm reviewing some of my underwriting spreadsheets, and I'd love your opinion on this:
When you're projecting income and expenses into the future, how do you calculate the growth of capex? Do you base its growth on inflation or on rent growth?
For example, let's say you're underwriting capex at 15% of rental income, which is currently $100K/year. You're also underwriting rent appreciation at 4% per year and inflation at 2.5% per year.
(Let's not get into a disagreement over how reasonable these numbers are. This is just a hypothetical.)
In three years, rental income will have grown to $112,486. If you continue to calculate capex at 15% of rental income, then capex comes out to $16,872. However, if you increase capex at the inflation rate for three years, you come to $16,153.
In this example, it's not a huge difference, but what if you're projecting income and expenses 10 years into the future? What makes more sense? Tying capex to the rate of inflation or tying capex to rent appreciation? (And let's assume that rent is appreciating at a faster clip than inflation. Let's assume we're in Phoenix!)
Rental Property Investor · Coral Gables, FL · Member since 2016 · 199 posts · 266 votes
5y
@Jon Schwartz, capex is usually budgeted for a specific business plan to upgrade the property exterior plus a % of the interiors based on quotes or your estimates. Future repairs and maintenance (R&M) are funded by the reserves of $250+/- per unit/year, depending on the location and condition of the property. Then if you know of specific future capex expenditures, you can use inflation to forecast roof replacements, etc. in 5 years or whatever period makes sense for the property. It's an art rather than a science.