Budget for CapEx vs Repair on long term rental property

6 Replies

I have bought four properties in the past year and prior to purchase, ran all numbers based on budgeting 10% for repairs and 10% for CapEx expenditures. These were acquired via turnkey, so in nearly all cases, all big ticket items are relatively new (within the past few years), though there is one instance where the water heater is a bit older and will need to be replaced in five years or so. So I realize that CapEx budget should reflect the reality of replacing those big ticket items by the approximate time their useful life is up which in most cases is far down the road.

But I struggle with this idea that I want those funds full NOW and not slowly accumulated over time. If I have extra money, I've been throwing it into those funds to build them up, sacrificing the HELOC principle paydown that those extra funds could be directed to.

Is 10% for BOTH repair and CapEx overkill? And how do you determine whether your extra money goes to principle pay down or building up those funds? I'm considering dropping CapEx to 5% to increase principle paydown but part of me is hesitant to do that to protect myself in the long run.

On an unrelated note, I will say that the repair funds that have accumulated have already been used on a few properties and it was really nice to know I had those items budgeted for from day one. I didn't feel it when it happened, just utilized the repair fund for each property to make up for the shortfall in rental income and moved on. YNAB is amazing for managing all of this easily IMO.

@Jason Howell bugeting for capex for a few singe family properties is overkill. All you need is about 6 months of rent in savings as a reserve for repairs. A hot water heater is less than $1,000. Capex is typically used in a commercial real estate setting. Paving a parking lot, replacing a roof, etc for a large apartment complex can easily get into the $100,000 range. But an SFR that has been rehabbed will have very few major expenses come up. Even if they do, a 6 month reserve should cover it. If you have enough units, you can cover this with you monthly cash flow without dipping into the reserves.

Originally posted by @Anthony Dooley :

@Jason Howell bugeting for capex for a few singe family properties is overkill. All you need is about 6 months of rent in savings as a reserve for repairs. A hot water heater is less than $1,000. Capex is typically used in a commercial real estate setting. Paving a parking lot, replacing a roof, etc for a large apartment complex can easily get into the $100,000 range. But an SFR that has been rehabbed will have very few major expenses come up. Even if they do, a 6 month reserve should cover it. If you have enough units, you can cover this with you monthly cash flow without dipping into the reserves.

Thank you. OK, so if CapEx on SFR is overkill, then that would technically free up the 10% that I have been saving for CapEx every month. What to do what those extra funds:

1. Redirect that extra 10% into the repair fund to get it up to 6 months worth of coverage funds ASAP (essentially would be throwing 20% per month into repair fund... that sounds like overkill)... 

2. Or I simply save the original 10% for repair over time and expect that somewhere down the line it will be filled to 6 months worth of rent coverage. Use the 10% CapEx I've been saving for extra principle paydown.

This is what I struggle with. In my mind, it's hard for me to take that extra $$ and apply it to principle when the backup reserves aren't yet fully funded.... (In case I need it!) But principle paydown is important too, so maybe I should adjust that line of thinking.

@Jason Howell You could do the math out and find your exact amount needed for Cap Ex:

Roof - 15 Years Remaining - $20,000 (estimated cost) = $111.11/month

Hot Water Heater - 5 Years Remaining - $2,000 (estimated cost) = $33.33/month

Total Needed for Cap Ex/Month = $144.44/month

Obviously there is more to add but you get the point!

@Jason Howell I keep my maintenance % high as I believe this is one of the most important expenses. Service requests in my area run high (Boston area) so getting a plumber out is at least $150 and then potentially more depending on the issue. I am trying to set aside roughly $100/month per unit. Best of luck!

Originally posted by @Jason Howell :

I have bought four properties in the past year and prior to purchase, ran all numbers based on budgeting 10% for repairs and 10% for CapEx expenditures. These were acquired via turnkey, so in nearly all cases, all big ticket items are relatively new (within the past few years), though there is one instance where the water heater is a bit older and will need to be replaced in five years or so. So I realize that CapEx budget should reflect the reality of replacing those big ticket items by the approximate time their useful life is up which in most cases is far down the road.

But I struggle with this idea that I want those funds full NOW and not slowly accumulated over time. If I have extra money, I've been throwing it into those funds to build them up, sacrificing the HELOC principle paydown that those extra funds could be directed to.

Is 10% for BOTH repair and CapEx overkill? And how do you determine whether your extra money goes to principle pay down or building up those funds? I'm considering dropping CapEx to 5% to increase principle paydown but part of me is hesitant to do that to protect myself in the long run.

On an unrelated note, I will say that the repair funds that have accumulated have already been used on a few properties and it was really nice to know I had those items budgeted for from day one. I didn't feel it when it happened, just utilized the repair fund for each property to make up for the shortfall in rental income and moved on. YNAB is amazing for managing all of this easily IMO.

 You are overthinking this. You've got a house that's going to need a hot water tank replaced soon. That'll run you about $1,000. Do whatever you want to do with your money. If/when the time comes needing to come up with $1,000 shouldn't be a stretch. If it is buying four properties isn't the best move.

Big ticket CAP EX is pretty predictable. Investors don't need to calculate %'s at all really. You are buying turnkey so i'd guess it's in the Midwest. I am in the Cleveland market so the numbers below will reflect that market specifically however most Midwestern turnkey markets should be very similar in cost and weather.

  • Roof is going to last roughly 30 years. Cost of a roof on a typical rental house $4,000-$6,000.
  • Furnace is going to last roughly 40 years. Cost to install a new furnace is roughly $3,000.
  • Hot water tank is going to last roughly 15 years. Cost to install a new hot water tank is roughly $1,000.

Thanks to everyone on this thread for your input on this. It has made me reevaluate whether I'm being a bit too conservative with my estimates and reserves. I'm shifting gears to put what was going into the capex fund into paying down the HELOC used for down payments to free that up. If something happens along the way, I'll have other reserves from my portfolio to utilize, and worst case, a portion of my heloc reserved to pay for something larger in a shorter term capacity. It seems my biggest priority should be freeing up that heloc for other opportunities and that would increase monthly cash flow as well.

Thank you!

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