How much do you put aside for CAPEX

Question

I was recently reading a Biggerpockets book on investing in rental property and I saw an interesting chart in the book about an estimate of typical CAPEX for a property. Curious if you think these #s are accurate I feel they are a bit low especially for something like changing a roof or replacing All appliances. What do you guys think? I attached a picture of the chart.

Also curious what due diligence do you do when estimating CAPEX and repairs for a new property?

John Teachout · Answer

I typically use about 10% for capex and an amount for maintenance depending on whether we rehabbed the property.That chart is goofy in my opinion. It's good in that it gets you thinking about stuff but the foundation and framing are not capex expenses in my opinion as they have essentially an unlimited life. The price for HVAC is low, plumbing? Not something you would typically change other than during a major rehab. The MAIN THING you need to take away is that there WILL be large expenses. Some will be predictable and some not. Things don't fail on a schedule but it is reasonable to expect a certain life from components. eg, our water heater here in our personal home is 19 years old. It could fail Tuesday and it may last 5 more years. I don't know, but I'll change it out when it goes kaput. If I buy a property with a 15 year old water heater, I'll expect it'll need replacing soon. I've had to do $5000 HVAC changeouts after owning a property a year. Just make sure to have money set aside for such events. We have capex come out of each property's rent every month but they get pooled in a bank account.

Joe Villeneuve · Answer

The chart has 2 glaring problems with it:

1 - It comes from someone's dream world2 - It must assume that all of the items mentioned will last their "lifespan" starting with the day you buy the property.  Not likely.

If we assume that the property is at least 10 years old when you buy it, and shorten the lifespan from there, and add all lifespans less than 10 years together and assume they must be replaced at closing, here's what we get

Year               TotalClosing         $11,100 (plus normal initial rehab, and assuming a new roof installed within 2 previous years))  5                $11,000 (Must redo rehab done at closing every 5 years)10                $22,000  (the roof isn't going to last 25 years)15                $11,000  (that every 5 year rehab)20                $ 25,000  ...and it gets worse from there.

My answer to the original question of how much do I take out of cash flow to cover this = $0.  Why?  It doesn't cover it, and it means you are taking money out of your pocket, that you have to recover again before a profit can start again.  This is a job for a HELOC of some sort.  Actually, you'd be better off with a business revolving LOC.

Paying out of pocket is a loss to you.  Paying for it with a loan/cash (LOC) means your tenant is paying it off for you.

Alexander Hitchon · Answer

Thanks that's very helpful as it's my first rental investment

Robert Beardsley · Answer

@Alexander Hitchon

I must have read you comment wrong it sounds like your asking about capx. I do 10% capex and 10% expenses.

Alexander Hitchon · Answer

That's interesting cause recently I was looking at a house built in 1890, so for you end up paying about 10% in CAPEX? What about for other additional small repairs how much do you estimate that as?

Robert Beardsley · Answer

10% but i have a a house thats 120 years old. i think it really depends on the condition of your property. if i had a newer place i would put 5-6%

Nick Rutkowski · Answer

I'll estimate 5-10% depending on the property class. So the idea is to save up for those big ticket items, by putting 5-10% away each month you can build those reserves to help offset the cost when you have to replace that item. My due dillagence with capital expenditures are though experience, once you start paying for the same thing over and over again you have an idea what the price will be.