How is everyone out there estimating CapEx?

Question

Hello all,

I've been analyzing several deals for small multi family homes and I took a suggestion from a blog post I found for estimating CapEx. The blog suggested putting aside $200 for capital expenditures, which I've been doing when running the numbers. However, last night I had attended webinar hosted by Brandon Turner where he walked us through an analysis of a rental property. He used a percentage of 6% instead of a flat amount. After the webinar I had two questions. How is everyone else estimating CapEx and do you adjust the amount of CapEx depending on certain variables? For example, would you change the amount set aside based on age of the property?

Your input is greatly appreciated and I look forward to reading your replies!

Joe Hines · Answer

Hey Brent!

I have been pretty safe using the following methodology:

• Initial CapEx Funding at property closing:  At closing, as part of my 'cash needed to close' calculation, I take 3% of the sales price and set it aside in a separate CapEx savings account.  This is a pooled account for all of the properties in each LLC.  I may adjust up or down depending on the initial repairs that it will take to get the property online and in production.  Generally speaking however, for a property that is ready to go, I will contribute 3%.  You'll notice the BP calculator allows you to include custom categories for closing costs and I just include the amount in one of these fields.  
• Monthly contributions:  Right now, I'm contributing 10% of rent each month to the same CapEx account (again, a separate account for each LLC and not for each property).  I've found that might be a little too much, but I'm not inclined to change it right now.  6% might be pretty much on target, but it does depend on the location (some areas simply have harsher conditions and also might be more expensive for repairs) and the age and condition of the property.  Whatever number you choose, including it in your cash flow calculations is essential.

Hope this helps!

Brent Murphy · Answer

@Joe Hines Thanks for the information. First I've heard setting aside money after purchase for capex, but I love the idea!