How much capex is too much?

Question

I own a 4plex that cash flows $795 with 10% vacancy, 10% capex, & 10% repairs included. It feels like ever since I bought it, it's been a capex nightmare (roof, two heating systems, replacing gutters, etc).

I dont think I've made any money due to all the capex. Is this a property you would dump or this is just a part of landlording?

Dell J. · Answer

Well if you already did all the CapEx you may want to consider keeping it.  Next time do an inspection when purchasing so that you know what your getting into in terms of deferred maintenance.

Greg M. · Answer

I wonder how you're viewing these expenses. Are you "mentally" assigning the entire cost to the present or breaking it down over the life of the item? A lot of people will look at a big expense and try to fit it in the present "it wiped away all my profit from the last 3 years" or "I'm not making anything for the next 3 years due to this expense".

The cost of a roof may equal the free cash flow for 3 years, but it is going to last 25+ years. A $20K roof only needs ~$65/month assigned to its expense.

Account Closed · Answer

Your answer lies in the answer to the math. Post more information including total income, annual expenses, mortgage insterest and principal and the potential to raise rents every year because the big money earned is from rent increases that automatically increase the property's value based on the Gross Annual Income and the Gross Multiplier, or the Cap Rate, or the Cash-On-Cash Return, or just how much do you really make including principal paydown and tax depreciation.

Never become married to a property. I spend half my life crunching numbers and when my numbers told me I could do much better by selling my 24 Las Vegas homes I dumped them like hot potatoes and have been very satisfied with what I used the money for.

Post your numbers and look to see if you can do better. Maybe, you can move up to 8 or 10 units and make many times more $$$.

Nick Barlow · Answer

@Cory Benhardt sounds like you’re two furnaces and 4 water heaters away from not worrying about capex on this property for a long time 🙂.

I presume it will even out in the end-right now, my “best performing properties” are those that haven’t had capex costs-they’re coming for sure though.

If your 4 plex is cash flowing $795/month, hold for another year or so. If this time next year nothing else has needed replacement and you have that amount in CF monthly, you’ll be happy with this property.

Brandon Beatty · Answer

Hey @Cory Benhardt! I have bought many similar properties. In my area I generally replace roofs & HVAC systems on most properties we purchase and include it in the budget if they haven’t been replaced in 8-10 years or so depending on the condition . These items are typical cap ex expenses in my opinion. As you get more properties under your belt it will be easier to understand the amount of cap ex needed from the acquisition and when the best time to replace the items will be

Josue Vargas · Answer

CapEx: Like some said before, take in consideration the condition of the properties when you fist acquired it.  Mechanical stuff breaks if no proper maintenance is provided.  I will go beyond that, mechanical systems can break without notice even with regular maintenance, is the nature of the beast.

One mistake most of us make is to underestimate CapEx.  You will learn this with experience.  Looking at the tags and plates of mechanical equipment when you are under contract on a property.  Calling your sub to look at the HVAC or roof, etc.  Not relying on the general inspection report of someone who is not specialized in any areas.  My experience is the general inspector most likely will refer to a specialist if they find something wrong with a system (they are covering their "assets"), ultimately is you who are paying for the new roof or new heater, HVAC, etc.

Call your specialists if you know of any systems that are dated or in need of attention before making an offer.

Cory Benhardt · Answer

@Greg M. That's a complete mindset shift. Thank you Greg. I can mentally taking that whole cost on at once.

Bjorn Ahlblad · Answer

Getting a good accountant will help a lot.

Bill Ward · Answer

Sounds like you're paying for capex expenses...and now they won't need to be done again for awhile. Were you expecting to not have to pay for a roof or hvac units at some point? Maybe I'm missing the question.

How much capex is too much?

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