Budgeting for CapEx

[Max T.]

So I've finally got around to creating a spreadsheet for CapEx budgeting and want to make sure I'm not missing anything. For each component I've estimated the cost to replace, the estimated number of months of remaining lifespan, and divided those numbers to arrive at an amount per month for each component. I've done that for all of my properties and totaled it up to show me how much I should be saving each month for that rainy day.

The components I am tracking are: roof, furnace, water heater. What am I missing? I don't have central air conditioning in any of the properties.

[Brandon Hall]

@Max T.

Are you accounting for the future value of your cost estimates via inflation? Your dollar will degrade in value over time, so rent you collect today won't be able to cover your expenses tomorrow unless you are accounting for it appropriately.

For instance, let's say you estimate that the cost to replace a roof today is $5,000. If the inflation rate is an average of 2.5%, in ten years the cost of that $5k roof has grown to $6,400. If you keep a consistent $5k in reserves due to your estimates today, you'd be scrambling to come up with an extra $1,400 in the future.

How do you combat this? You first forecast the future value of the replacement based on inflation and expected remaining life of the asset. You then figure out the best money market fund/account out there that will keep your reserves super liquid while also keeping up with inflation. Then you figure out how to address any interest rate gaps. For instance, if your money market account returns 1.5% annually, and inflation is 2.5%, you need to figure out how to close that 1% gap.

This is the biggest problem I see with capex calculations and reserves. You can do a great job estimating everything today, you can estimate ever component down to the screw, but if you don't adjust your reserves and budget for the future value of the capex, it may hurt when the time comes!