Budgeting for CapEx

7 Replies

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.

Roof, HVAC are the big ones. water heater isn't too bad really.  

what if you just account for those plus a few % for the things you aren't thinking of. You'll never be able to consider everything.

Don't forget about appliances and carpet if you have any. I usually get 4-5 years out of carpet at my rentals depending on the tenants. 

@Michael Julian

 thanks for the tip. Lucky me I don't have carpet either. Hardwood and tile all the way.

As for appliances, what is the average lifespan for a new gas stove, electric stove, refridgerator, diswhasher, washer, dryer? What else am I forgetting? I thought about including appliances at first but then decided against it. Almost all of them cost about half a month's rent to replace new, so I figured them to be part of maintenance instead of capex. But a fridge is pretty expensive so you're making me reconsider...

@Max Tanenbaum

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!

Thanks @Brandon Hall . I get what you are saying 100%. To close the gap you mention I just plan on over-estimating the replacement costs.

Originally posted by @Brandon Hall :

@Max Tanenbaum

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.

Hopefully, investors are smart enough to invest in the area where rent goes up as time goes... That might break even with inflation rate. 

That being said, I was reading Frank Gallinelli's book while ago and I realized I didn't really incorporate NPV into my formula for CapEx, equity value, cash flow etc. I think one day, I will grab my intro to accounting book and re-do my spreadsheet.

@Roy C.

 by NPV are you referring to what @Brandon Hall was mentioning? 

And yes I do hope rents continue to increase along with inflation, but Brandon makes a good point. How can we incorporate that into our CapEx budget?

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